Starting an ecommerce business can be tricky for a new entrepreneur. From finding suppliers, setting up a shopping cart, identifying affordable shipping options, setting up a merchant account, creating a marketing plan – there are plenty of business matters to keep the aspiring entrepreneur busy. Additionally, ecommerce businesses still have to deal with the standard business concerns such as accounting, legal liability, taxes, and filing the appropriate regulatory documents.
One of the most important tasks at the beginning of your ecommerce business is decide whether or not to incorporate. While it’s possible for an ecommerce business to operate as a sole proprietorship or as a partnership – which avoids the initial costs and paperwork of incorporating – unless you plan to keep the business extremely small or your venture is mostly experimental, incorporating is something you should strongly consider. Incorporation protects your personal assets from creditors (unless you give a personal guarantee), shields you from legal liability if a customer files a lawsuit (except in cases of fraud), and it can have significant tax advantages as well. In the case of an ecommerce business, some suppliers may also be more willing to do business with an incorporated business, rather than with a sole proprietor.
However, starting as a sole proprietorship/partnership may be the right choice if your ecommerce business is launching extremely lean. If you’re shipping items from your garage and don’t have any employees, or if you’re simply drop shipping items directly from the supplier, avoiding incorporation at the beginning of your ecommerce business may be the logical choice. But even if you’re launching with minimal investment and costs, incorporating may still be a wise decision under certain circumstances. If you have significant personal assets and you’re selling a product that could make you a potential target in a civil lawsuit (e.g. nutritional supplements, exercise equipment), then the minimal costs of incorporating is a small price to pay for security and peace of mind.
Additionally, if you’re already a highly paid professional or a successful business owner and you’re starting your e-commerce business on the side, there may be significant tax advantages to incorporating your new business and holding the profits in a corporation. It’s generally recommended to seek the advice of an experienced attorney when deciding whether or not to incorporate. However, you can save a significant amount on the costs of the incorporation process by incorporating through an online service, rather than through an attorney.
Should You Form An S-Corp or LLC?
Once you’ve decided that the benefits of incorporating outweigh the disadvantages for your ecommerce business, your next step is to decide if you should form an LLC or an S-Corporation. For smaller businesses an LLC is usually recommended, but there are usually advantages to forming an S-Corp once your firm reaches a certain size. If you have significant venture capital funding or you’re partnering with an established brand, you may want to consider an S-Corp. However, most new ecommerce businesses start fairly small since ecommerce businesses don’t have the added overhead of a storefront. In these cases, an LLC may be the better choice.
An LLC structure typically requires less formalities compared to an S-Corp in terms of required meetings, resolutions, and management, making it the preferred structure for smaller ecommerce businesses. However, this can vary depending on your specific circumstances and your state, so again it’s highly recommended that you seek legal advice in order to fully understand the implications of your decision. You can also view the following guide to better understand the differences between an LLC vs S corporation.
Note: The content above is provided as a general reference, and is not legal advice.