It’s no secret that entrepreneurship is booming, as evidenced by the record number of recent business applications filed in the United States last 12 months. What’s not so clear? How these businesses needs to be organized as legal entities.
To file for a company or to not file for a company? This is the first query. The second query is: What form of legal entity should this business organization have?
In this text, we’ll cover small businesses that are just getting began, side hustles, and e-commerce startups. So should an e-commerce business file for registration? The short answer is yes. And what form of registration should it’s? Well, that’s the longer answer.
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Understanding Sole Proprietorship
First, to be clear, any business, e-commerce or otherwise, can start without incorporation. This is the default form when a business is in the planning stages or just getting began. This is often called a sole proprietorship.
Entrepreneurs across the country proceed to begin and run their businesses as sole proprietorships, especially if the business is perceived as having little overhead and limited growth potential. Think of side hustles or businesses began while someone is still in school or working full-time.
Advantages of sole proprietorship:
- Simplicity: There is little to no paperwork required to begin a business. There are no ongoing maintenance requirements. Essentially, once you begin operating as a business, you are a sole proprietorship.
- Full control: The owner has full control over the company.
Disadvantages of sole proprietorship:
- Personal responsibility: One person owns and runs the business, with no distinction between the business and the owner. This means that the owner receives the profits, but is also personally liable for the expenses incurred by the business, in addition to for debts, losses, and liabilities. If the business has financial problems, the owner’s personal assets (corresponding to a home or savings) are at risk.
- Limited growth potential: Sole proprietorships are normally suitable for very small businesses, side hustles or hobbies. As a business grows, the need for a more formal structure becomes apparent to accommodate increased sales, revenue and expenses.
Why do you have to switch from a sole proprietorship to an LLC or corporation?
While sole proprietorships are easy and offer complete control, their limitations in liability protection and growth potential often make it obligatory to transition to an LLC or corporation as your enterprise grows. An LLC or corporation can provide the legal and financial structure needed to administer increased sales and revenues, offer liability protection, and support continued business growth.
Benefits of Establishing an LLC
Ideal solution: Online retailers or e-commerce store owners who seriously plan to expand their offerings and business.
For those of you who run online stores and are pondering about expanding or perhaps even opening a brick-and-mortar store,Establishing an LLC (Limited Liability Company) may very well be your golden ticket. Not only does an LLC make your enterprise look legitimate as a corporate entity, it also offers a ton of flexibility. It can assist you to build a strong status as a trusted brand while protecting your personal and skilled assets from liability.
Advantages of an LLC:
- Limited Liability Protection: It means that you can separate personal and skilled assets, so that the owner has less personal liability.
- Flexibility: Allows members an equal say if the account is member-managed and a selection of how the account is taxed by the IRS.
- Growth Potential: It leaves the door open to growing your e-commerce business internationally or going public via an IPO someday.
C and S Companies
Joint Stock Company (C Corp)
Ideal Solution: Larger e-commerce firms planning significant growth or trying to reinvest profits back into the business.
An AC Corporation (C Corp) is a separate legal entity that is taxed as a business entity, with its owners taxed individually. This structure is suitable for larger firms or startups that are looking for rapid growth and potentially looking for investment. C Corps can handle larger profits more efficiently, but they incur double taxation at each the company and individual levels.
S Corporation (S Corp)
Ideal for: E-commerce businesses and startups trying to gain asset protection and save on taxes.
An S Corporation (S Corp) is technically a C Corporation with a different tax designation under the Internal Revenue Code. It allows profits to be passed through to the owners’ personal tax returns. It offers asset protection and potential tax savings, making it a good fit for growing e-commerce businesses. However, if your e-commerce business is generating a lot of profit, an S Corp is probably not the best fit. Really high-earning businesses may do higher as a regular corporation.
To elect S corporation status, you could first establish a joint-stock company and then file Form 2553 with the IRS.
Benefits of Forming an LLC or Registering a Company
Forming an LLC or corporation is an essential first step that provides the obligatory foundation for operational and financial operations. Once you’re capable of open bank and credit accounts in the corporation’s name, you’ll be able to higher manage your enterprise by tracking expenses and income individually from your personal funds. You can connect your enterprise accounts to accounting software and save time by excluding personal transactions, so you’ll be able to focus on what’s essential to your enterprise. It’s also easier when it comes time to file taxes because your enterprise’s income and expenses are already in one place, ready for you or your accountant to arrange your taxes.
Frequently asked questions
Q: What is the first step an entrepreneur should consider when starting a business?
A: One of the first questions an entrepreneur should ask is whether to file for a company or not. Deciding on the right form of company formation is crucial to its future growth and legal structure.
Q: Can you begin a business without formal registration? What is it called?
A: Yes, you’ll be able to start a business without formal registration as a sole proprietorship. This is the default type of business when a business is just starting out. It requires minimal documentation and no ongoing maintenance, making it ideal for low-risk ventures or hobbies.
Q: What are the principal kinds of business structures suitable for e-commerce businesses?
A: The principal kinds of business structures suitable for e-commerce businesses are the sole proprietorship, the limited liability company (LLC), and the S corporation. Each has its own benefits and is suited to different levels of business growth and complexity. For example, an S corporation may offer more favorable tax treatment than other structures.
Q: What is an S corporation and why might it’s helpful for an e-commerce business?
A: An S Corporation (S Corp) is not a separate legal entity, but a tax designation under the Internal Revenue Code that allows profits to be passed through to the owners’ personal tax returns, avoiding double taxation. It provides asset protection and potential tax savings, making it helpful for growing e-commerce businesses.
Q: Why might an e-commerce business decide to form a limited liability company (LLC)?
A: An e-commerce business may decide to form an LLC because it offers flexibility, protects personal and skilled assets, and helps build a strong brand status. LLCs are ideal for businesses with serious growth plans and can later convert to a corporation if needed.
Corporations today
Fast, friendly, reliable filing service for any state, specializing in Limited Liability Companies (LLCs), C Corporations, and S Corporations. We also decipher the intricacies of the Corporate Transparency Act, providing key services to maintain your enterprise compliant and reputable.
If you make a purchase, we are going to receive a commission, at no additional cost to you.
Summary
Moving from a sole proprietorship to an LLC or C Corporation is a critical step for any business trying to grow while protecting personal assets. While the process could appear complicated, it is essential to securing the legal and financial advantages these structures provide.
Corporations today makes this transition seamless with our comprehensive LLC formation service. We handle all the pieces from filing the obligatory paperwork to making sure your company is fully compliant in your chosen state. Get the support you would like every step of the way, including ongoing guidance and access to key documents like your Articles of Organization and Certificate of Incorporation.