Hey Guys, this is Alan Chen with the Free Cash Flow Agency, and I’m a Certified Public Accountant, and first of all, thank you for watching this video. In this video, I want to explain the different business structures available to online com business owners and then give you my recommendation on the best business structure for eCommerce business that you must go with.
So let’s get started and if you have any questions anytime during the video, feel free to drop a comment below, and I will do my best to give you an answer or even create a video for it if enough people are facing the same issue. So if you guys are starting, I bet I can guess what business structure you are in – you are a sole proprietorship.
Why do I know this? Because most people, when they start a business, want to feel it out first and see if it will grow before committing.
And that’s brilliant to save a few bucks as you go through trial and error.
In general, there are 4 Types of Business structures you can form for your business; there is:
- Sole proprietorship,
- Limited Liability Company Aka LLC.
A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual without distinction between the business and you, the owner. As soon as you start selling anything with the intent of profit, you are, by definition, a sole proprietorship. Automatically, you don’t need to tell the government anything; you are this by default. Now you may think, oh well, it seems pretty nice; I just automatically gained this statue, and there’s nothing to file- while this is true, there’s a BIG problem we will go over in a few minutes.
Next, we have a partnership. As the name may imply, a block is when you enter a business with another person. You and your partner both share equal risk and reward for the company. There are different types of partnership; the most common type is the general partnership, which means you are equally managing the company with your partner.
Just like being a sole proprietorship, this does not require you to file any paperwork with the state, but what is recommended is you sign a partnership agreement with your business partner. Hence, you guys are on the same page regarding how to split profit/loss and manage your business.
There’s also another common type of partnership called a limited partnership; this is usually a partner that does not have time to devote to the business but instead offers monetary investment to the general partner so that they can run the company on their behalf. In any case, with both a sole proprietorship and a partnership, there is an important issue: you are liable for ALL the business debts.
That’s right, since there is no separation between you, as a person, and the business if you are sued or you rack up a ton of payables or debts, the court can take your assets (meaning your house or your car) to pay for the outstanding debts.
That’s a big no-bueno.
And that’s why the following business structure is the most popular way to set up your online business in the US: an LLC, aka Limited Liability Company. Why is it essential I become an LLC? What are the benefits?
So LLC is one of the most popular methods when businesses incorporate because it offers certain benefits over just operating as a sole proprietorship. One of the most critical factors is this crucial concept called… Limited personal liability.
This means that if your business gets sued, the extent that they can go after is all your business assets; they can’t go after your assets such as your private home or car- Which helps you sleep better at night knowing that. And it is one of the easiest setups in terms of paperwork, and unlike C Corp (which we will go over next), there is no double taxation as all the income is “pass-through” to your income tax filings.
Also, there are flexible profit distributions. You can choose to distribute the profit however you like, no matter how you contribute to the company.
So it’s pretty awesome, and if you have any questions on how to set this up, feel free to comment below; I will try my best to help you guys.
Now there is one concept I want to warn you guys about: “Piercing the corporate veil”- the idea is basically that if you do not separate your personal and business assets, you can be sued for your purchases. As the case can be made, there is no separation between your business and emotional side.
You don’t want this to happen to you, so I highly suggest you start or find someone to help you clean up your bookkeeping leaks and ensure your business and personal sides are entirely separate.
Corporation Or C-Corp
Last but not least, once your business has grown to a particular stage, you will want to become a full-on corporation or a C Corp. A C Corp has many distinct advantages and disadvantages. Some of the benefits include being universally recognized and accepted as a legitimate business; since there is much more complex paperwork and filings you have to do when you are a C corp, you have the most separation between the company and the owner and, in general only the business entity itself will be responsible for any loss or liability- it has incredible flexibility as far as shareholder structure and management structure. It is beautiful if you are seeking venture capitalist money.
Now here’s the downside, a C-Corporation is subject to double taxation. It is taxed at the corporate level, and then when the dividends are paid out to shareholders, they are taxed again at the personal income level.
A corporation is more complex to operate than an LLC. The corporation laws require more formalities in how a corporation is managed. For example, shareholder and director meetings are required. Proper notice must be given, and minutes kept. In contrast, LLCs can be organized more informally. Corporation laws also tend to have stricter record-keeping requirements.
There is, however, a special kind of setup called an S Corp, or I like to call it the super Corp. It is a hybrid structure that lets you avoid double taxation while protecting a corporation. It’s pretty impressive, and there are also some other tax benefits to being an S corp, so let me know if there’s interest in this topic, and I will make a separate video just focused on this structure.
So all that said, what is my recommendation regarding the best business structure for eCommerce business? I think you guys have a pretty good idea from me going over the pros and cons above, but the most recommended setup for business owners online is the LLC. I highly recommend that as soon as you know, your business has the potential to hit 6 figures plus, you immediately look into setting up an LLC.
You want to ensure that you can sleep well at night when you run your business, knowing no one can go after your house, car, or personal bank account. There are many resources online on how to set this up, and if you have any questions, feel free to comment below.
Additionally, suppose your business is looking for an all-in-one solution to save on taxes and have great bookkeeping done on your behalf. In that case, you can click the link in the description and book a free consultation call with FCF Agency, and we will see if we can be a great fit together.
We only want to take on clients we know we can create impact and give them back valuable savings, so it’s a great sign if we like you on the call.