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Meanwhile, discover strategies to boost conversion rates, transaction size, and customer engagement in our Idea Guide.
Meanwhile, discover strategies to boost conversion rates, transaction size, and customer engagement in our Idea Guide.
Over the years, people have gotten more and more used to buying things online, at almost the same pace with which many companies and independent creators have worked to get their products and services online.
Today, the average shopper expects to find just about any product online, pay for it, and have it delivered to their address.
For them, that is pretty much where their worries end, but for you, the business owner, running an ecommerce business involves many more considerations: picking the right name, taking great product pictures, cataloging them, setting the right prices, marketing to different customer segments, and handling logistics.
While there are indispensable ecommerce tools that help you handle most of these steps efficiently, structuring your business the right way still rests largely on you. There are many different types of businesses that work well online, but some are more successful than others.
Aside from the fact that these very successful businesses have proper processes and procedures, they also pick a business structure that is built for their specific product or service offering, and that is very important.
We've compiled a list of the different structures for your ecommerce business, highlighting how each one works, how to know whether it fits the goals you have for your business, and surfacing the legal requirements for running such a structure.
Before we list these structures, you need to know that each one has its pros and cons, and you can always adopt a new structure as you grow or your business needs change.
As the name implies, this structure puts ownership as well as the business risks on just you. You don't even need to register the business name you pick for the brand because the business isn’t considered to be different from you under law.
It is the simplest structure you can adopt, especially when testing an ecommerce business idea or starting out and trying to keep your costs really low.
This business structure is considered a non-employer business structure, which means you can’t hire extra hands or have paid staff. To do so, you will have to adopt a different structure, which thankfully is easy and can be done at any time when you feel the business needs it.
You will also enjoy low taxes, because you only do one tax filing for yourself, none for the business.
In the meantime, you have full control of the business decision-making process under this structure and will learn a lot about offering a great online shopping experience, since that rests on your shoulders alone.
On the flip side, every liability that comes to the business also rests on you. Running into financial trouble might mean having to tap into your personal finances or selling off assets to handle business debt. Same goes for legal issues; in the event of an incident, you would be sued and held personally accountable..
As your ecommerce business grows, or right from the beginning, you might decide that you require more funding and expertise to achieve your goals, and for that, you may opt to work with a co-owner. When you find one, two, or even more partners, and you all agree to contribute and launch the ecommerce business together, this is considered a partnership.
A partnership is a little similar to a sole proprietorship, in the sense that the business you form with your co-owners is not treated as a different entity from you the owners. Instead, each of you is taxed based on what share of income you earn from running this ecommerce business.
The taxation might vary based on the partnership structure that you and your co-owners have decided on. If you agree to a general partnership, this means that the profits, assets, and liabilities of the business are equally shared among the owners, and the taxes each owner pays will be the same.
If you agree to a limited partnership, this means that your co-owner is only liable to debts within the amount they invested in the joint business.
Unlike in a sole proprietorship, you have help within a partnership structure and don’t have to make all the decisions or bear all the liability alone.
While it is also as easy to set up as a sole proprietorship, partnerships face the legal entity challenge which implies that the debts of the business could eat into the personal assets of the owners since the law doesn’t recognize it as a standalone entity.
You also have to deal with the possibility of conflicts with your partners, as you will not all agree at all times.
Starting a corporation structure takes your ecommerce business to a new level where it is now regarded as an entity separate from you, which can hire staff, seek funding, or even bring on multiple partners as needed. This relieves you of a lot of personal liability and that’s a huge plus for you and your business.
Given that your business is now an entity of its own, it is taxed separately from you the owner, with the taxation being on the profit made by the business.
As a shareholder in the business, you will also be taxed based on the income you have made from the company’s profits, and in addition, you might have other local or even federal taxes required of you.
Although a corporation can be harder to form and manage, you are able to hire as many hands as you need under this structure and can raise funding to scale the business by selling shares.
Unlike a partnership, raising capital through shares splits the assets and risks of the business to as many shareholders as your corporation wants without meddling with your personal assets.
This means that a company losses or debts to customers are totally taken care of by what the company as its own entity has, except in cases where the corporation is badly managed and there’s proof that it wasn’t treated like the separate entity it is meant to be.
A limited liability company (LLC) structure is a best-of-both-worlds kind of structure, given that it lets your ecommerce business enjoy the protection from personal liability typical of corporations, but makes the business ownership structure as simple as what is obtainable in a partnership.
LLC owners, who are referred to as members, can choose how the business is taxed, with the options being partnership-style taxation or corporation-style taxation. This means that if you choose this structure, you can avoid the double taxation process where you pay personal taxes and a business tax as seen with corporations.
The tax you will pay will therefore be on the profit made by your LLC ecommerce business, and possibly payroll taxes if applicable.
Now that you know the different business structures, it is time to answer the pressing question about which one is best for your ecommerce business, and in most cases, the answer is an LLC.
An LLC is great because the business structure is simple to form, the management style is a very flexible one, it gives you room for tax choices, and ensures your personal assets are protected. You can read an LLC ecommerce success story here.
Beyond choosing what you want to sell online, your company name, and how your logo should look, it is important to think ahead about a number of things.
For instance, you need to ask yourself how much personal risk you are willing to take by starting your ecommerce business, and understand whether you need partners or staff while starting out. This would determine the structure you choose and make all the difference for your business.
Beyond the tax benefits and the simplicity of an LLC, most people pick the LLC structure because of the opportunity it affords them to bring other members on board and leverage the extra expertise they bring.
Also, you have to consider funding sources for scaling the business. You can always get family and friends to support you, but some level of growth requires loans and external funding and an LLC business structure makes it easier to access that.
While the paperwork needed to incorporate and structure your business right might seem tedious and less attractive than making sales, it is often what gives you an all-around win.
While an LLC is the best business structure for an ecommerce business, the process of forming one is not particularly an easy task, especially for foreign founders.
It is important you get it right to prevent tax liabilities, civil liabilities, protect the personal assets of the owners, and generally keep your corporation in good standing with the state of incorporation.
All this costly, time-consuming work can take several weeks and you still may not get it right. The good news is you don’t have to do it the hard way.
With a partner like Firstbase.io, you can incorporate and launch your business in 3 - 5 days from the comfort of your couch.
Backed by Y Combinator, Carta Ventures, CEO of TransferWise, and many others, Firstbase.io is the easiest, fastest, and most convenient way to launch a company in the U.S today.
Firstbase.io has helped over 10,000 entrepreneurs incorporate and launch their businesses in America.
Founders who incorporate their businesses through Firstbase also access over $100,000 in perks.
If you do not live in the U.S or are not a citizen, then you need not worry either as Firstbase.io has partnered with Mercury to help you set up a bank account for your business without stepping foot on U.S soil.
Ready to form your LLC and launch your eeommerce business? Visit www.firstbase.io to get started. It takes less than 5 minutes!
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About the author: Carlos is a Product Partnership Manager at Firstbase.io. He is passionate about startups, venture capital, SaaS sales, and helping startups get funded in Latin America. Visit www.firstbase.io to learn more about how Firstbase.io is helping founders worldwide to succeed.
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