Business Structures
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Structures
Your Options
(i) Sole Proprietorship
(ii) Partnership
(iii) Company
Whether you’re just starting out or deciding the right structure for your existing company, understanding the law around business organization is important. This chapter will outline three commonly used options: a sole proprietorship, a partnership or a corporation. You’ll have to decide which option will protect you most from liability while affording you the greatest amount of benefits.
Sole Proprietorship
This is the most common structure for online storeowners, and also the easiest to run and set up. A sole proprietorship is ideal for businesses with a relatively low risk of liability.
If you're operating under a name other than your own, register it with the appropriate authority — either your state or county office depending on where you do business. This is called registering your DBA (“doing business as”) name, and ensures that only you are conducting business in your area under that name. You can find information about DBA registration in your area here. They’re not always required, but the permits and registrations you may need are governed locally. Consult your government- supported local Small Business Development Center to make sure you have everything you need.
Although you need to have the correct permits, no separate entity is created for your company with a sole proprietorship. Your personal and business assets are one and the same, and your business taxes are found on your personal tax return.
Your company can evolve beyond a sole proprietorship in the future if need be, but this is a simple and low cost way to start operations of your online shop.
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Pros
(i) Easy to set up and run.
(ii) Control of all business decisions and profits.
(iii) The company does not file taxes
Cons
(i) Not a separate business entity.
(ii) You are responsible for all debts or actions against the company.
(iii) If business is doing well, you could in a higher tax bracket.
Partnership
A partnership is another common structure for small businesses, and contains many of the simplicities of a sole proprietorship.
Partnerships are formed when two or more individuals work together as co-owners of a business venture. This structure allows individuals to pool their assets and skills to increase their chances of success.
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Agreements
Considerations
A well-drafted and balanced agreement should include:
(i) Names of partners and how new partners can be added.
(ii) Outline of the business.
(iii) Investment liability and profit share of each partner.
(iv) What if partnership is dissolved.
Like a sole proprietorship, there’s no separate entity created for your online shop. You need to submit an information form about your partnership to the IRS (Internal Revenue Service), but each owner pays all taxes on their personal income statement.
With this form of organization, remember to focus on the human element. There’s always a chance that a friendly partnership can change in the future. For this reason, make sure to have a lawyer assist you in drawing up a partnership agreement. Selecting the right partner is also important because you’re liable for the debts and actions they incur on behalf of the business.
Although care should be taken when starting up, partnerships are a simple way to collaborate with others for a successful business.
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Pros
(i) Allows for a division of work, capital and profits.
Cons
(i) Not a separate entity.
(ii) Jointly liable.
(iii) Assets are jointly owned.
Corporation
The incorporation process is more complicated than the other two options but does have many potential benefits for your online business.
This is another instance where speaking to a lawyer is important. The process is not overly complicated, but there are ways a lawyer can structure your company to maximize benefits.
One of the most notable differences about this structure is that the corporation becomes a separate entity from you as the owner. This means you’re not personally financially liable for what happens to the corporation, and your personal assets are protected from the liabilities created by your shop. When your store grows — and the liabilities you’re exposed to grow with it — this is a huge benefit.
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Pros
(i) Separate entity.
(ii) Limits personal liability.
(iii) The corporation survives the death of shareholders or sale.
(iv) Tax advantages.
(v) Improves your credibility.
Cons
(i) Heavily regulated.
(ii) Extensive record keeping required.
(iii) More expensive to form (there are fees associated with incorporation).
Choosing a business structure
It's important to consider the unique aspects of your business when deciding which organizational structure to choose. Before finalizing your decision, consult a lawyer to make sure you’ve made a sound choice and that the process is completed properly.
Conclusion
Share This Guide
Being aware of and obeying the rules that apply to you as an online business owner is an important aspect of running your shop.
Protecting your brand, your assets, and maintaining a positive customer relations are all affected by your ability to understand and obey the law.
The law is fluid and can always change! The resources provided to you in this book will allow you to stay up to date and make sure you are aware of requirements placed on you.