Which Business Entity Is Best for an Ecommerce Business?

Starting an ecommerce business can be thrilling and rewarding, but it also involves crucial decisions that can significantly affect your company’s future. 

One such decision is choosing the right business entity. The structure you choose not only impacts your taxes but also affects your liability, fundraising potential, and day-to-day operations. With numerous options available — sole proprietorship, ecommerce LLC, C-corp and more — finding the ideal entity can seem daunting. 

This guide will help you navigate through the options and make an informed choice for your ecommerce venture.

Common Business Entities for Ecommerce

When it comes to ecommerce, several business entity options are commonly considered. 

Here’s a look at each:

👉 Sole Proprietorship

What it is: The simplest and most common structure, where the business is owned and operated by one person.

Why consider it: Easy to set up with minimal costs and straightforward tax filing.

👉 Partnership

What it is: A business owned by two or more individuals.

Why consider it: Combines resources and skills of multiple owners, with shared responsibilities and profits.

👉 Limited Liability Company (LLC)

What it is: A hybrid structure that combines the flexibility of a partnership with the liability protection of a corporation.

Why consider it: Offers personal liability protection without the complexities of a corporation.

👉 Corporation (C-Corp and S-Corp)

What it is: A legal entity that is separate from its owners, offering strong liability protection.

Why consider it: Easier to raise capital and provide stock options, making it suitable for larger businesses.

Pros and Cons of the Different Business Entities

Every business entity has its unique advantages and disadvantages. 

Here’s a detailed look at each:

Sole Proprietorship

Pros:

✅ Simple setup

✅ Complete control

✅ Straightforward tax filing

Cons:

❌ Personal liability for business debts and obligations

❌ Limited ability to raise funds

❌ Business continuity is tied to the owner

Partnership

Pros:

✅  Easy to establish and manage

✅  Shared responsibilities and decision-making

✅  Pass-through taxation, avoiding double taxation

Cons:

❌ Personal liability (except for limited partners)

❌ Potential for disputes among partners

❌ Shared profits and decision-making

Limited Liability Company (LLC)

Pros:

✅ Limited personal liability

✅ Flexibility in management and operations

✅ Pass-through taxation, which again avoids double taxation

Cons:

❌ More paperwork and state-specific regulations

❌ Heavy annual fees and compliance requirements

❌ Can be more complex to set up compared to a sole proprietorship or partnership

Corporation (C-Corp and S-Corp)

Pros:

✅ Limited liability for owners

✅ Easier to raise capital through stock issuance

✅ Perpetual existence, regardless of ownership changes

Cons:

❌ Complex and costly setup

❌ Double taxation for C-Corps

❌ More stringent regulatory and compliance requirements

What to Consider When Choosing a Business Structure for Your Ecommerce Store

Choosing the right business structure for your ecommerce store involves considering several factors:

Liability Protection

 An LLC offers protection against personal liability, which is essential if your business faces lawsuits or debt. This means your personal assets, such as your home and savings, are generally protected if your business incurs debts or is sued.

Tax Implications

Different entities have various tax obligations. LLCs and S-Corps provide pass-through taxation, which can benefit small business owners. This means profits and losses are reported on your personal income tax return, avoiding double taxation. 

Let’s say your ecommerce LLC makes a profit of $50,000. With pass-through taxation, you only pay taxes on that profit once on your personal income tax return, rather than being taxed at both the company and personal level.

Operational Complexity

Sole proprietorships and partnerships are simpler to operate but offer less protection and flexibility. Corporations, on the other hand, require more rigorous record-keeping, operational processes, and reporting.

Funding Needs

Corporations, especially C-Corps, are better suited for businesses needing significant capital investment. They can issue stocks to attract investors, which is beneficial if you plan to scale your business rapidly. 

 For example, if you’re planning to launch a large-scale ecommerce platform that requires significant investment in technology and marketing, forming a corporation can make it easier to attract investors by offering them shares in your company.

Growth Potential

 If you plan to grow your business significantly, a structure like an LLC or corporation might be more beneficial in the long run. They offer better scalability and legal protections as your business expands.

State Regulations

Different states have different requirements and costs associated with forming and maintaining various business entities. It’s important to research the specific requirements in your state.

Industry Requirements

Some industries have specific requirements or best practices that influence which business entity you should choose. For instance, certain industries might have stricter regulations or higher risks, which can impact the decision to form an ecommerce LLC or corporation. 

For instance, if your ecommerce store sells health supplements, you might need to adhere to specific industry regulations regarding product safety, labeling, and distribution. 

In such cases, forming an ecommerce LLC can provide a formal structure to help you comply with these regulations. It also offers liability protection, which is crucial if you’re operating in a high-risk industry where legal issues are more likely.

Why Use doola To Form Your Ecommerce LLC

With a 4.6-star rating on Trustpilot (at the time of writing) and highly-rated customer support, we’re absolutely proud to be a trusted partner to our clients residing worldwide.

Backed by industry leaders like Y Combinator and Harvard Management Company, doola is a reliable choice for ecommerce entrepreneurs ready to take the leap into U.S. business ownership.

Here are some benefits of our formation services:

Simplified Process: doola excels in simplifying the formation process for an ecommerce LLC, making it straightforward for both U.S. residents and non-residents. 

Our formation experts guide you efficiently through each step, allowing you to focus on scaling your online store without worrying about the paperwork.

Legal Compliance: Ensuring compliance is crucial for ecommerce businesses, particularly when operating in the U.S. market. doola provides resources and ongoing support to help your LLC adhere to all legal requirements, making it easier for non-residents to navigate unfamiliar business laws.

Tax Advantages: Forming an LLC with doola offers pass-through taxation benefits. This means your ecommerce profits are reported directly on your personal tax returns, potentially simplifying tax obligations and keeping more money in your business.

Personalized and Dedicated Support: We offer personalized services tailored to your unique needs. Each customer is assigned a dedicated account manager committed to your success. 

Whether you prefer live chat, email, or phone, we provide multiple communication channels to ensure you get timely assistance.

U.S. Bank Setup and Business Services: doola assists non-resident entrepreneurs in overcoming one of the biggest challenges — setting up a U.S. bank account. 

Our services simplify this complex process, ensuring your ecommerce business has a strong operational foundation. 

Additionally, we provide registered agent services to maintain compliance with state requirements.

Additional doola Resources for Your Business Formation and LLC Needs

By choosing doola’s Total Compliance Max package, you unlock all core features of doola along with these valuable perks:

✅ Business Mailing Address

✅ Employer Identification Number (EIN)

✅ Customized Operating Agreement

✅ Annual State Filing Services

✅ Dedicated Account Manager for personalized support

✅ CPA Tax Consultation to navigate your tax requirements

✅ IRS Federal Tax Filing assistance

This package ensures your ecommerce LLC is not only set up efficiently but also remains compliant and supported every step of the way.

Ready to take the plunge? Book a free consultation and get your ecommerce business off to a flying start!

FAQ

1. Can I switch my business entity type as my ecommerce business grows?

Yes, as your ecommerce LLC evolves, you can change your business entity type. For example, you might start as a sole proprietorship and later transition to an LLC or corporation as your business expands and your needs change.

2. What is the cheapest business entity to start for an online store?

Typically, a sole proprietorship is the cheapest and easiest business entity to start. However, it offers the least protection. An LLC is a popular choice for ecommerce businesses because it provides liability protection at a relatively low cost.

3. How does an LLC protect my ecommerce business from personal liability?

An ecommerce LLC protects your personal assets by creating a separate legal entity. This means that if your business faces lawsuits or debts, your personal assets like your home or personal savings are generally protected.

4. Do I need to register my entity in every state I sell in?

You do not need to register in every state you sell in. However, if your ecommerce LLC has a physical presence, employees, or significant sales in a particular state, you may need to register there. It’s best to consult with a legal expert to understand your specific requirements.