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What’s the Best Structure for My Ecommerce Business?

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The legal formation of your new business is one of the first and most important things you must decide on, as it will affect your tax strategy, debt liability and more. Here’s our answer to this frequently asked question, with a quick rundown of the structures used by ecommerce businesses.

Sole Proprietorship
Great for: The individual who runs a fairly small business from home, and doesn’t want any bosses or partners involved in the operation.

As the name suggests, you are the single owner of the entire business. Whatever money the business earns goes into your personal bank account, and the company’s debts are paid from that account as well. The business does not file a separate tax return; its income (or loss) is “passed through” to your personal tax return.

Partnership
Great for: Friends or family members who want to go into business together.

With this business structure, you and your partner will share the profits and losses, and are jointly liable for the company’s actions and decisions. Usually, decisions can’t be made without the express consent of all partners. As with a sole proprietorship, the business is not legally separate from its owners.

LLC (Limited Liability Company)
Great for: Ecommerce owners who want to stay independent while protecting their personal assets from the company’s legal liabilities.

The big difference between the previously discussed structures and an LLC is that its owners are not personally responsible for the company’s debts or lawsuits. For tax purposes, if it is owned by one person the IRS will consider it a sole proprietorship, and if owned by several people it will be considered a partnership. The LLC can choose to be taxed as a C-corporation or S-corporation, but that is not necessary.

Corporation
Great for: Those who want to scale the business up and raise capital through issuing stock in the company.

A corporation is a completely separate legal entity from its owners; in fact, you are not technically its owner at all, you are a shareholder (even if you own 100% of the shares). If you perform management or other duties for the corporation, you are its employee and get paid a salary, rather than directly taking profits out of the business. You may choose to register as a C-Corporation or S-Corporation.

There are some limitations in what type of ecommerce business structure you choose — if, for example, one or more of your partners is a foreign national. To make a truly informed decision, please discuss the options with your Xendoo tax professional or a legal advisor.

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