Incorporating your eCommerce business is a step in the right direction. Choosing the right company structure will make your taxes less of a pain, and it will give you the protection you might need should something go wrong with your business.
Read this guide to find out which legal structure is the best for eCommerce.
What is an eCommerce business?
eCommerce businesses are companies that operate online and involve buying and selling goods or services through the Internet. It enables consumers to browse and purchase products or services from anywhere in the world with an Internet connection.
The transactions are usually completed through online payment methods, and the products are shipped or delivered digitally to the customer. Examples of eCommerce businesses include online marketplaces, stores, and auction websites.F
Should You Incorporate an eCommerce Business?
The short answer is yes.
If you’re serious about running your eCommerce business, scaling it, and keeping it long term; then you should incorporate it.
Incorporating your business carries many benefits, from tax savings to credibility.
What Is a Legal Structure?
A legal structure, also known as a business structure, is the organizational structure of your business.
The legal structure governs the possibilities of your business.
It’ll determine whether you can raise capital, have more decision makers, or sell your business. It’ll also determine the amount of tax you and your business will pay.
When choosing a legal structure for your business, you need to think about the goals of your business, who is involved in the business, and the financing behind the business.
What Is the Best Legal Structure for eCommerce?
Most people start their eCommerce business using the sole proprietorship structure because the paperwork is easy and the tax rates are good.
This business structure is ok while you’re figuring things out, but it’s better to officially incorporate your business in the long run.
The main reason to do so is to separate yourself from your business.
If you’re running your eCommerce business under the sole proprietorship structure, you’re personally responsible for your business. When you incorporate, your business is treated as a separate entity.
What Does This Mean?
‘Imagine this scenario; you’re dropshipping from China. You scale quickly and get $1000s worth of products to customers all over the US. All of a sudden, all your customers start getting back to you asking for refunds. Turns out the batch from the manufacturer was faulty.
Your payment processor freezes your account. There isn’t enough money to cover all your refunds. You end up owing money to the payment processor/ bank.
The debt and legal proceedings will be on you.
This is because a sole proprietorship doesn’t offer limited liability.
Limited liability means that your business is treated as a separate entity and it doesn’t affect your personal credit, assets, etc.’
If you incorporated as an LLC, your assets would be protected in this scenario.
What Is an LLC?
An LLC stands for Limited Liability Company.
An LLC is the best structure for eCommerce because it’s tax-efficient, simple to incorporate and run, and offers limited liability. It’s the perfect hybrid of sole proprietorship and corporation business structures.
What Other Legal Structures Are There?
The most popular business structures in the US are sole proprietorship, partnership, LLC, and corporation.
Sole proprietorship and partnership are very similar, the only difference is that the partnership involves ‘partners’ in the business. For example, when you’re running your eCommerce business with a friend; you’re business partners. Sole proprietorships and partnerships don’t separate the business from its’ owners. You and your partners will be liable.
A corporation is a complex legal structure and it’s not recommended for small businesses. The taxation and paperwork are different from a sole proprietorship or an LLC. A corporation is for businesses that want to attract outside investors. It can sell and transfer shares. A corporation is treated as a separate legal entity, just like an LLC, but it’s much more difficult to run.
An LLC is the middle ground between a sole proprietorship and a corporation. It offers limited liability like a corporation, but it keeps the simplicity of a sole proprietorship.
What are the benefits of an eCommerce business?
eCommerce businesses have revolutionized the way we shop, sell products, and conduct business. There are numerous benefits of an eCommerce business.
Convenience for Customers and Business Owners
eCommerce businesses allow customers to shop from anywhere at any time without the need to visit a physical store. This convenience gives customers the flexibility and freedom to browse, compare prices, and purchase from the comfort of their homes. On the other hand, this also enables business owners to manage their stores from anywhere worldwide, as long as they have an internet connection.
Cost Savings Compared to Traditional Companies
Operating an eCommerce business helps reduce operational costs compared to traditional brick-and-mortar stores. Business owners do not need to pay for rent, utilities, and other associated costs of maintaining a physical storefront. These savings enable eCommerce businesses to offer competitive product or service pricing.
Increased Reach
One of the significant advantages of eCommerce businesses is that they can reach more customers than traditional brick-and-mortar stores because they all have a specially designed website. By operating online, eCommerce businesses can target customers from all over the world, which significantly increases their potential customer base.
Data Analytics for Business Insights
Data analytics is another benefit of eCommerce businesses. Online transactions generate a wealth of data that can be used to improve product offerings and selling, marketing strategies, and customer experiences. Business owners can gain insights into consumers behavior, preferences, and purchasing patterns to make informed decisions and tailor their strategies accordingly.
Scalability and Growth Opportunities
eCommerce businesses offer scalability and growth opportunities. As sales increase, businesses can quickly add more products or expand their operations without physical space or location limitations.
The Benefits of LLC Formation for an eCommerce Business
Forming a Limited Liability Company (LLC) can provide several benefits to an eCommerce business, including:
Personal Asset Protection
One of the main advantages of forming an LLC for an eCommerce business is that it offers personal asset protection. As a separate legal entity, the LLC shields the owner’s assets from any financial obligations or legal liabilities of the business. Personal assets such as a home, car, or personal savings are not at risk in case of a lawsuit or debt.
Credibility and Professionalism
Forming an LLC can add credibility and professionalism to an eCommerce business. It shows potential customers, investors, and partners that the companies are serious about its operations and is committed to long-term success.
Flexibility in Management and Taxation
An LLC provides flexibility in management and taxation, allowing the business to choose between different management structures, such as member-managed or manager-managed. Additionally, an LLC can be taxed as a sole proprietorship, partnership, S corporation, or C corporation.
Easy Compliance and Reporting Requirements
LLCs have less stringent compliance and reporting requirements than other business structures, such as corporations. This makes it easier for eCommerce business owners to manage and maintain their businesses without worrying about complex filing requirements.
Separation of Business and Personal Finances
An LLC requires a separate bank account, which helps keep business and personal finances separate. This makes it easier to track business expenses, calculate taxes, and avoid any confusion or commingling of funds.
To recap; when you incorporate an LLC for your eCommerce business, you’ll benefit from liability protection. You can also take advantage of things like no income tax if you incorporate in Florida, for example.
Read more about the best states for business formation,
How to start an eCommerce business?
Starting an eCommerce business can be challenging, but it can also be rewarding with the right approach. Here are some steps which can help you start eCommerce business models:
Identify a Niche
The first step in starting an eCommerce business is to identify a niche. This involves researching potential products or services you can offer, assessing market demand, and evaluating your competition.
Develop a Business Plan
A business plan should present your goals, vision, financial projections, and strategies. This plan should include funding options, marketing strategies, and operational procedures which is equally important for big and small businesses.
Choose a Business Structure and Register the Business
Choose a business structure that suits your needs, such as a sole proprietorship, partnership, LLC, or corporation. Once you have chosen a business structure, register your business and obtain any necessary licenses and permits that will allow you to sell products.
Build a website
Build a website that showcases your products or services, provides information about your business, and allows consumers to make purchases. You can either hire a web designer or use an eCommerce platform like Shopify or Magento, which can help you create great websites.
Secure Payment Processing
Set up a payment processing system that is secure and easy for customers to use. This includes integrating with payment gateways like PayPal, Stripe, or Authorize.net.
Create a Marketing Strategy
Create a marketing strategy that includes SEO, social media, email marketing, and other digital marketing channels. This helps you drive traffic to your website, increase brand awareness, and boost sales.
Fulfill Orders and Provide Customer Support
Once customers start placing orders, make sure that you have systems in place to fulfill those orders and provide excellent customer support. This includes setting up inventory management, shipping and delivery, and returns and exchanges policies.
Is LLC Formation Difficult?
LLC formation is really easy when done through a specialist service like this. Even though there are different types ecommerce, all you have to do is fill out a simple form, pay the fee, and your business will be officially incorporated in just a few days.
Remote company formation is available to citizens, residents, and non-resident aliens of the USA.
How Much Does LLC Formation Cost?
The cost of company formation varies from state to state, and from service provider to service provider. Businessanywhere.io has the best rates and the best packages for remote company formation. By using your credit card, you can quickly subscribe to our services.
Click Here to Register Your LLC Today!
