Exploring The Most Effective Business Structures For Startups in an E-Commerce Setting
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If you are currently interested in starting your own e-commerce business, one of the first things that you’ll have to consider is what type of business structure you’ll go with.
Even though the most dominant U.S business entity overall is a sole proprietorship, data shows that most e-commerce-centric large scale businesses tend to register themselves as either Corporations or Limited Liability Companies (LLCs).
All of the other business structures available- such as general partnerships and sole proprietorships, are neither the most suitable nor the most practical for business owners looking to sell items online.
This is because they provide a set of exclusive monetary and fiscal benefits that can significantly propel a business’s long-term growth, a fact which is further proliferated in an e-commerce setting (as we will further explore in this article).
Below we will discuss the best business structure for e-commerce businesses, focusing primarily on the different specificities and benefits of Corporations and LLCs.
Are C Corporations Second Best?
Generally, most startups (within or outside of the e-commerce industry) have little to no reason to register themselves as a C Corporation.
This is because C Corporations are taxed at a federal flat rate which, as of 2021, is currently 21%. Moreover, under a C Corporation, that same revenue will be taxed for a second time when the shareholders of the company file their personal tax returns.
This concept is known as "double taxation", which should likely be avoided for all small businesses and startups that do not have surplus capital.
Having said that, small business owners who are eligible can register their company as a C Corporation, and then opt to impose subchapter S of the U.S. Internal Revenue Code. In essence, this allows all shareholders to avoid double taxation as S Corporations pay no federal tax.
Instead, they adopt a "pass-through" taxation structure that is similar to that of LLCs; all profits generated after the company’s expenses are settled are funneled directly to the shareholders of the S Corporation, who then pay tax individually.
Are LLCs Taxed As S Corporations The Holy Grail?
Specialised attorneys, accountants and field-specialists generally recommend an LLC structure that categorizes itself as an S-Corporation so as to benefit from as many tax deductions as possible.
In pragmatic terms, such an option allows business owners to combine the "flexibility" of an LLC with the managerial and tax advantages of an S-Corporation. It may be worth noting, however, that in cases where there is only one shareholder (and consequently one owner) they will be categorised as a W2 employee (and not as self-employed).
An LLC (with multiple owners) is taxed very similarly to a partnership; the profits and losses are ‘passed through’ to the owners of the company, who are then responsible for paying income tax on a personal level- there is no federal tax involved.
Similarly to the aforementioned S-Corporation, an LLC business avoids double taxation, and- where there is only one owner in an LLC, statutory law mandates that the company will be automatically disregarded as a separate financial entity and it will be dealt with in an identical way to that of a sole proprietorship.
Overall, a Limited Liability Company is known as a "check the box" structure, as it may choose to adopt both a partnership or a corporation tax arrangement; it provides increased flexibility and peace of mind, which starting entrepreneurs will undoubtedly value greatly.
Final Thoughts
Individuals looking to engage professionally with the prolific e-commerce business will likely benefit greatly from an LLC structure, but this is by no means the only acceptable business entity available.
Contrarily, finding a suitable business structure for yourself will likely be highly dependent on your business’s (and your own) specificities, as your: state and federal taxation laws, managerial structure, and ownership credits will greatly affect your business’s prospective growth.
