One of the most common steps to starting a small business is for an entrepreneur to incorporate it as a business entity. The benefits of incorporating a business are practically endless. Incorporated businesses receive a credibility boost, tax savings (for some entities), and are able to quickly establish a professional identity to potential customers and partners.
Let’s laser our focus in on ecommerce businesses for a moment. Is there a “right” entity to incorporate as? Yes and no — let’s take a look at formations that may be the best fit for ecommerce-based businesses.
A sole proprietorship is the ideal entity for entrepreneurs that want to be the only one calling the shots. It’s affordable, requires little paperwork to file, and allows the business owner to truly be the business. They exercise complete control. If you plan to go it alone with your ecommerce business or run a company that is fairly free from liabilities — like a consulting agency run from home — this may be the entity for you.
It’s important to note that you become the business when you incorporate as a sole proprietor. What does this mean? Unlike its limited liability company (LLC) counterpart, sole proprietors do not receive liability protection when they incorporate. They are held liable for everything that happens within the business because it is not a separate entity.
It’s affordable, requires little paperwork to file, and allows the business owner to truly be the business.
Sole proprietors face additional hurdles. For those that want to expand the business and its line of credit, they must allow their credit history to be reviewed. Why not review the credit history of the business? It doesn’t have one of its own due to its legal structure. Sole proprietors must also apply for basic business licenses, much like their LLC and Corporation counterparts. This applies to every type of sole proprietorship, even a business based out of your home garage.
Limited Liability Company (LLC)
I’ve written before about what it means to incorporate as a limited liability company (LLC). This entity is popular with a wide variety of businesses across all industries. Incorporating as an LLC means your ecommerce business receives a flexible structure and liability protection.
If something unforeseen should happen to your business, like a lawsuit, it would not financially impact personal assets like cars and homes.
What is liability protection? This ensures that your professional and personal assets are kept separate. If something unforeseen should happen to your business, like a lawsuit, it would not financially impact personal assets like cars and homes.
Think you might want to expand your ecommerce business to a storefront one day? Incorporating as an LLC provides entrepreneurs with a flexible structure perfect for the transition. Plus, there’s the added bonus of reaping in tax savings!
Do you want to make money from your ecommerce business and do good? Consider forming a B Corporation. This entity is for companies that wish to balance profit and purpose. B Corporations are for-profit businesses that meet the highest standards of social and environmental performance, transparency and accountability.
This entity is for companies that wish to balance profit and purpose.
Out of all of the entities mentioned here, incorporating as a B Corporation may be the most intensive. Interested entrepreneurs cannot simply file paperwork for the formation. They must first pass the certification process. This means completing (and passing) the B Impact Assessment test as a performance requirement. Then, for legal requirements, ecommerce business owners must determine if they need to elect B Corp status with their business. Finally, once they have passed the certification process, they may sign the B Corp Declaration of Interdependence and Term Sheet to announce that they officially a B Corp.
Which Entity Is Right For My Ecommerce Business?
Every ecommerce business is different, so it would be very difficult for me to advise on the “best” entity for your company to incorporate as. My advice is to sit down and thoroughly review your business. Take a look at your business plan to determine what the long-term future looks like for your company. This will better help you decide which entity to incorporate as, based on the needs of the business.
Want to know more about incorporating your ecommerce business? Leave your questions below!