In 2015, the portion of global retail sales from ecommerce was just 7.4%. That figure rose to 18% by 2020 and is expected to reach 22% by 2024. Like many others, this growth might drive you to consider starting an ecommerce business.
If so, you need to know that ecommerce requires professional accounting to succeed. Ecommerce accounting services help online entrepreneurs run their businesses efficiently and find opportunities for growth. This article looks at the value of ecommerce accounting services to your ecommerce business.
Sole Proprietorship Versus Limited Liability Company
Among the reasons many people are considering ecommerce is its perceived simplicity. It doesn’t need much to get started. You can use online marketplaces such as Shopify Etsy, eBay or Amazon as your storefront and make an office or warehouse out of a room in your home. You can even operate the entire business from your phone and laptop.
One way to run your ecommerce business is as a sole proprietorship. As a sole trader, you and the business are the same entity, meaning your wage is your profit, and you bear all the risk. However, professional accountants recommend going the limited liability company route for a few important reasons.
Even though running your ecommerce business as a limited liability company might be more costly and complex, it provides your company with the opportunity to elect for specialized tax structures which can reduce your overall tax liability. Some common tax elections include S-Corporation or C-Corporation.
Furthermore, as the name suggests, operating a limited liability company limits your liability. That means that the company, and not you, has legal risk. So, suppose someone sues because you provided them a faulty service or product. The lawsuit is filed against your ecommerce business, not you. For these reasons, many online entrepreneurs run their businesses as limited companies with the help of ecommerce accounting services.
Accounting For Inventory
Did you know that your inventory spend is not always deductible? One of the most common mistakes that we see our clients make is assuming that all your inventory spend is tax deductible. According to the IRS, if you produce, purchase, or sell merchandise, in your business, you must keep an inventory and use an accrual method for purchases and sales of merchandise. In simpler terms, your inventory is nondeductible for accounting or tax purposes until it is actually sold!
Filling VAT or Sales Tax Returns as an E-commerce Business
When your sales exceed a specific tax threshold, you might need to register for value-added tax (VAT) or Sales Taxes, meaning you need to send yearly, quarterly or monthly returns into local tax authorities.
If you’re like most ecommerce business owners, you find accounting for VAT or Sales Taxes burdensome and anxiety-inducing because it’s painstaking, and mistakes can attract costly penalties from the tax authorities. An Ecommerce Accounting Firm can do much of this work on your behalf. The same goes for payroll requirements, business/corporation income tax returns.
Furthermore, ecommerce often involves selling products or services to customers in other countries, so you’ll have to account for customs fees. An Ecommerce accounting firm can help you navigate the accounting process involved in international trade.
Accounting for Earnings from Your Ecommerce Business
Receiving revenue payments for products or services you sell on online marketplaces such as Amazon often involves making several adjustments. Examples of adjustments you might need to make include refunds, chargebacks, sales taxes, and overseas shipping fees. It is essential to know what adjustments to make and how to enter them into your accounts. The reasoning is very simple, gross revenues are reported to the IRS (and potentially other tax authorities) and therefore, errors in accounting for revenues is essential to get correct.
You also need to account for the corresponding taxes, such as VAT, corporation tax, sales tax and so on. Using an Ecommerce Accounting Firm can ease the process of accounting for these items. Moreover, the services that these firm provide can help you handle issues related to net deposits. These include:
- Numerous distinct transaction types
- Serving markets in different regions or countries
- Payment periods varying across two months or two financial years
- Multiple deposits made for thousands of transactions
- Receiving batch payments
- Platform’s handling tax on your behalf
Accounting for all these issues can be overwhelming, which is why many online entrepreneurs rely on firms that provide ecommerce accounting services.
The Value of Ecommerce Accounting Services
Ecommerce accounting processes are hassle-free when you use reliable ecommerce accounting services and the right accounting software. Having professional guidance and the right tools on both eliminates many of the complexities of running your business as a limited liability company. You can perform different transaction types and sell to customers in different countries with ease.
Aspiring ecommerce entrepreneurs may fail to start or quit too soon because ecommerce accounting seems too complicated. The different rules and regulations seem intimidating. But this needn’t be the case because many ecommerce business owners have succeeded with the help of ecommerce accounting services.
All these winning business owners need to know are the basics and leave the complicated bit to reliable accounting professionals and firms with extensive experience in this ecommerce space. Most accountants may have a general understanding of the issues discussed in this article. However, you want to hire an accountant with specific knowledge of ecommerce accounting to take all the guesswork out of the process.
The Best Ecommerce Accounting Solutions
As an aspiring, or budding entrepreneur, ecommerce may present you with exciting opportunities. Using reliable ecommerce accounting services from the outset increases your chances of getting off to a great start. Contact The Ecommerce Accountants to discuss ecommerce accounting solutions.
