There has never been a better time to enter the realm of ecommerce. In fact, ecommerce is predicted to grow by over 11% in the next few years. Before you can select the products or services to sell on your platform, you need to make a key decision: your business structure.
The right business structure helps you minimize your tax liability, reach your growth potential, and safeguard your personal assets. In this article, we’ll cover the main business structures you need to know as an ecommerce seller and why it’s important to revisit your structure on a regular basis.
Sole Proprietorship/Single-Member LLC
Oftentimes, entrepreneurs resort to a sole proprietorship when first starting out. This is because the setup is simple and doesn’t require a separate Employer Identification Number or business tax return. Sole proprietorships are similar to single-member LLCs in that both report income or loss on Schedule C of the 1040. However, the main difference is that single-member LLCs are required to incorporate with the state they reside in.
This structure is best for early-stage entrepreneurs because of its flexibility. Despite the ease of reporting, sole proprietorships and single-member LLCs have very little separation of business and personal assets, come with self-employment taxes on all profit, and make it difficult to raise funding. Moreover, there is no continuity option, as you are viewed as the business in the eyes of the IRS.
Partnership
Unlike sole proprietorships and single-member LLCs that have only one owner, partnerships must have two or more owners. Income or loss is distributed to each partner based on their ownership percentages. There is greater separation of business and personal assets but expect expanded reporting requirements. Partnerships must file a separate business tax return and adhere to the requirements in the partnership agreement.
Additionally, decisions must be made according to the partnership agreement, which usually includes a majority vote on important decisions. This structure works well for bootstrapped brands that have more than one founder but aren’t profitable, as raising capital is easier.
S Corporation
S corporations and multi-member LLCs taxed as s corporations are the next business structure you should consider. S corporations combine the principles of LLCs with the liability protection of corporations. Like a partnership, s corporations pass all income down to the shareholders. However, s corporations can elect to pay state taxes at the entity level.
S corporations allow you to save on self-employment taxes and work well for profitable brands that already pay reasonable compensation to owners. Despite these benefits, s corporations have complex requirements, such as no foreign shareholders, and income tax is due on all profits regardless of if it’s distributed.
C Corporation
C corporations are the most complex and expensive structure to maintain. One of the main benefits of c corporations is the ability to limit your taxes, with the current Federal rate at 21%. Nevertheless, there is double taxation when you take money out of the company. First, the profits are taxed at the corporate level. Then, the money is taxable to shareholders as dividends.
This entity structure is best for ecommerce businesses looking for outside investors, as the transfer of ownership is simple. In addition, c corporations make it easy to obtain equity and SAFE financing. There is also a complete separation between business and personal assets. However, the Amazon accounting and bookkeeping for Shopify companies can be complex with stringent requirements.
The Importance of Revisiting Your Structure
The business structure you chose when first starting out might not be the best fit as your business begins to grow. If you are looking for simple Amazon accounting, a sole proprietorship might be best when just starting out. What happens when your business begins to grow and generate a profit? You might be on the hook for significant self-employment taxes.
Going over your tax situation with an ecommerce CPA can help you determine if you have the correct structure for your business. Especially if you are in the growth phase, Amazon accounting services and Shopify accounting services by an expert are indispensable when it comes to minimizing your tax liability.
Next Steps
Do you need help choosing a business structure? How about evaluating if your current structure is best for your ecommerce business? To answer these questions, it’s best to contact an Amazon FBA CPA or a Shopify CPA that can combine the power of extensive ecommerce experience and tax knowledge. Reach out to a team member today to learn more.
