LLC, Sole Proprietorship or S Corporation?
Worries about accounting, liability, filing regulatory documents, choosing a shopping cart and finding sources for inventory can cause you to abandon your plans for an ecommerce business even before you get it off the ground. Knowing about how businesses work and making a smart choice in the beginning will make life easier for you. U.S. based businesses have three choices when starting a new enterprise.
Sole proprietorship - If you are the sole person investing in and running the business, this is the best choice for you. It is the easiest business to form and manage with no corporate taxes, but there is taxation on all profits. The risk involved here is there is no legal distinction between you and the business. As a result, you have no personal protection if your company if a member of any lawsuit, and are liable for all debts incurred by your business.
S Corporation - An S corporation (the “S” refers to a subchapter of the U.S. Internal Revenue Code), can be formed with a minimum of one to a maximum of 100 Shareholders. The company itself never pays income taxes; instead, each individual shareholder has to declare their pro-rated profits or losses in their own income tax returns. With this business, there is a clear distinction between you and your company. If the company is sued, you will not be held liable personally except in the cases of gross negligence, fraud or sloppy record keeping that commingles personal and business affairs,. This also applies to LLC’s, the other company you can form.
LLC (limited liability company) - As the name itself suggests, LLC ensures that your personal risk is low. While similar to S Corporation’s in that manner, this business is a little different in other aspects. It needs less paperwork and record keeping because it is not a corporation and the stakeholders in the company are as Members as opposed to Shareholders. Taxation is according to the members’ pro-rated ownership in the company.
In conclusion, Sole proprietorship is risky if you expect your business to grow and be sustainable over time. LLC would be the safest way to start and can be easily converted into an S Corporation when the need arises. The best way to get started would be to consult your accountant, file your business online on the secretary of state’s website, get a good insurance plan and get to work!