You have anidea foragreat new service oraninnovative product that you want tomarket andsell online. You’ve created your business plan, bought theperfect domain name, andare ready tokick itinto high gear andturn your ideas into ahuge, thriving, million
So… now what? The next step fortheemerging entrepreneur istoregister your business. Here we’ll cover thebasics ofsetting upshop asasole proprietorship, anLLC, oracorporation.
Let’s start with theWhy?
Forming your
Asole proprietorship provides you with absolutely zero personal liability protection.
Ifthesole proprietorship has debts orliabilities, they are your personal debts andliabilities.
Let’s pretend some person somewhere isinjured asaresult ofyour product. Or, remember that rad name you came upwith foryour business? Maybe another company was already using itandhas aregistered trademark. Those people can take legal action.
Source:
Ifyour LLC/corporation issued orissubject toliabilities, ideally your personal assets will beprotected from anyjudgments. Without anLLC, corporation, orother similar entity, alawsuit toyour business is
Soifajudge decides that you were using that other company’s trademark, then your house, savings accounts, andother assets could beatrisk inaddition toanyofthebusiness’s assets.
LLCs andcorporations are separate,
Now theWhat?
Sole proprietorships give nopersonal liability protection, nor dothey provide anysort oftax benefits. LLCs andcorporations are identical when itcomes topersonal liability protection. But that’s about where thesimilarities end.
Ifthesole proprietorship has debts orliabilities, they are your personal debts andliabilities.
Though laws will vary
Sole proprietorships, LLCs, andcorporations also have different tax treatments. Sole proprietorships andLLCs are
Corporations have double taxation, meaning theprofits are taxed when they are earned bythecompany, then taxed again when they are distribution toshareholders. LLCs are not subject tothat double taxation. Soformost eCommerce startups, anLLC will bethebest bet.
However, there are afew advantages that acorporation has over anLLC. Some stock options, employee stock purchase plans, andretirement plans are only available tocorporations. Corporations don’t have topay taxes onthese andother fringe benefits.
And ifyou plan tomake itbig with your small business andgopublic, corporate stock may beeasier tosell than units ofanLLC.
Finally, theHow?
Forming asole proprietorship iseasy— you just start doing whatever itisyou want todo. Ifyou are going tooperate thebusiness under aname different than your own name, you can register aTrade Name ord/b/a with theSecretary ofState.
Toform anLLC oracorporation, you will need tofile certain documents with your Secretary ofState’s office andpay thefiling fee. LLCs file Articles ofOrganization andcorporations file Articles ofIncorporation.
Your state will also require that you list aregistered agent ontheArticles ofOrganization orArticles ofIncorporation. The exact requirements ofthese documents andfees vary greatly between states.
Next, you will need todraft anyinternal documentation
This isagood place toget started, but does not cover everything there istoregistering your business. There are other documents anditems your eCommerce business may need inaddition totheLLC orcorporate filings. Documentation requirements vary business tobusiness.
Since thelaws andrequirements foryour LLC orcorporation will depend onyour specific business andstate, itisalways agood idea toseek theadvice ofalawyer. And while we’re onthetopic oflawyers, let’s give adisclosure statement saying this blog isnot meant tobetaken aslegal advice— we’re eCommerce experts, not alaw firm. :)
Check out — aColorado based attorney who helps small businesses. She has agreat YouTube channel tohelp you decide whether toset upshop asasole proprietor, anLLC, oracorporation.
Conclusion
Deciding how toregister your business depends onmany variables. Take into account thebenefits andshortcomings before rushing into registering your business.
| Sole Proprietor | LLC | Corporation | |
|---|---|---|---|
| Liability Protection | No | Yes | Yes |
| Formation | None (unless operating under atrade name) | File Articles ofOrganization | File Articles ofIncorporation |
| Taxes | All income istaxed aspersonal income totheowner | All income istaxed aspersonal income totheowner | Double taxation |
| Documentation | None | Operating Agreement andannual memorandum isrecommended, but may not berequired |
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