Which Business Structure is Best for an Online Business?

One decision you'll have to make if you've decided to start a business online is what business structure is going to be the best for you. And the starting point in making this decision is understanding what your choices are.

Business Structures for Online Merchants

There are many business structures formally formed by the IRS, but as you want to take your business online, only a few apply to you.

Sole Proprietorship

Under a sole proprietorship, the business is owned and operated by you. Dropshippers -- companies that sell products but do not keep stock -- small owned-and-operated businesses and people who can only afford to pay a small amount in taxes usually go for this structure. If you want to set up an online eCommerce store without having a lot of paperwork and paying hefty taxes, this business structure is the No.1 top choice for you.

Paperwork

You don't have to fill out a form to create your business, although you might need to get a local permit to operate it legally in your area.

Tax

The taxes you will pay on sole proprietorships are lower compared to other businesses.

Registration

There is no registration cost. You're not going to register the business as a tax entity since your tax will be based on your personal income.

Liability

The liability with this structure is high. Your home, cars, and other assets become your investments if you go into debt. Your creditors can sue you personally for the debt. In this business structure, you'll be conducting all businesses in your name, leaving you responsible for all the business dealings.

Advantages

You start the business just by operating the business.
You do not have to fill out an application.
It is an excellent way to test a business idea; you can dissolve the business at any time.
You control and make all business decisions.
You keep all profits.

Disadvantages

You are the business; the business is you.
Everything belonging to you becomes a liability should you accrue losses in the business.
You don't have protection from any lawsuit filed against the business.
The taxes you pay are sometimes higher compared to others.

I recommend this structure if you own and run your business alone, or you have little capital to start a business. It is good for people who plan to open and operate online stores. Finally, if you have an idea to test, the sole proprietorship is the best way to start.

Partnerships

If you're looking to partner with others to start a business, you may want to consider a partnership. It is a flexible business structure that allows partners to share responsibility and liability among themselves. There are three different types of partnerships.

General Partnership: No paperwork is required for this structure; you just start the business together with a partner. You don't need registration to start either. You and your partners form a partnership just by acting as a business.
Limited Partnership: One of the partners, known as the ''general'' runs the day-day operations of the business while the others only invest in the business.
Limited Liability Partnership: This is a mixture of the other two legal structures we just discussed. Every member has a say in the day-to-day operations of the business. The liability on each partner in this business is also reduced compared to others. You can fill out the paperwork in one afternoon. You're going to need a Certificate of Limited Liability Partnership, local permits, and register an EIN (employer identification number) for your business.

Tax

For General partnership and Limited Partnership, you will pay taxes on each member's personal returns, while in a Limited Liability Partnership, you pay taxes on the business separately.

Liability

The liability in GP and LP businesses is quite high. That makes you and every other member of these legal entities personally responsible for any debt the business incurs. On the other hand, LLPs reduce liability for every member of the partnership.

Advantages

You don't have to register or fill out any paperwork to start a General Partnership.
You and other partners can decide whether to pay taxes on personal returns or separately as a business.
In a partnership business, you're actually pooling each other's resources and talent together.

Disadvantages

You can be held responsible for other member's actions.
If one of you quits the partnership, it can lead to the dissolving of the business.

You should go for the LLP structure for your business if there are more than three partners, and you want your business funded by private investors. If you want simplicity when it comes to taxes, thumb LLP.

Limited Liability Company (LLC)

This structure gives you and your partners more control over your brand. It helps everyone keep their personal assets separate from the business's retail assets.

Paperwork

You'll register a business name for the business. You'll also file for the Articles of Organization, Operating Agreement, and Business Licenses.

Liability

Every member of the partnership is treated separately from the business.

Advantages

It is not limited to a number of partners.
Partners can easily choose the type of taxation system for the business.
The profits are not taxed twice.
Easy to build credibility with customers.

Disadvantages

Members must keep business records and financial statements.
You'll need to meet formally annually.
It's not easy to raise startup capital.
Business tax increases as profits increases.

If you and your partners don't want to mix business with personal affairs, consider LLC structure. Partners prefer a business without tons of paperwork, simple and one they can adapt to. You and your partners will enjoy a business that is stable and grows in credibility.

Wrapping Up

The structure you choose for your business may not seem like a big deal to you now but come tax season or in case of a lawsuit, it will. So choose carefully. If you need to, ask a professional to assess your needs and recommend the best structure for you.