Choosing a legal structure for your eCommerce business is very important. The legal structure usually affects the decisions you make, from how you start the business to its funding. For eCommerce businesses, a sole proprietorship is a popular structure adopted by most entrepreneurs. Here is what you should know about eCommerce business legal structures explained by our eCommerce experts.
What Is Sole Proprietorship?
In a sole proprietorship, the business entity is owned and operated by a single person. This means that the eCommerce business is completely inseparable from the owner. The law usually views you and your business as one entity. There's no separation of assets and responsibility in this business structure.
If you want to start an eCommerce business without engaging in a lot of paperwork or complicating the business taxes, a sole proprietorship is the best legal structure. The sole proprietorship is a popular legal structure adopted by many eCommerce business owners.
Benefits of Sole Proprietorship
The main benefit of running your eCommerce business as a sole proprietorship is the simplicity involved. In some jurisdictions, it's possible to operate your business under your own name, without necessarily having to register for a business license.
This legal structure also comes with lower accounting and operating fees, since everything runs under one entity. For a new eCommerce business, it will be simple to operate a sole proprietorship because the legal requirements are not extensive like in the case of partnerships and corporations.
Why Should You Register Your Sole Proprietorship?
When you start selling online or set up your own online store, your sole proprietorship will engage in a retail business. When creating an eCommerce business, you'll be required to show that your business is a legal entity. Thus, this requires you to have tax registration documents or an establishment license.
For your eCommerce business to collect online payments, it has to be registered. This allows you to integrate the business with a recognized gateway. Registering your eCommerce business also helps you avoid confusion and other problems related to law. The online retail business will also get more trust from customers when it's registered and recognized.
Cons of a Sole Proprietorship
Your personal assets are linked to the eCommerce business. In case the business incurs debts in your name, creditors can easily sue you at a personal level in order to collect the debt. Also, if you have personal debts that are not paid yet, creditors can potentially go after your business to recover the debts.
A sole proprietorship does not exist as a separate entity, meaning that you're conducting the business under your name. This makes you responsible for every business dealing. Most eCommerce business owners usually find this level of liability to be acceptable. There are also other challenges facing eCommerce businesses that you should be aware of and try to avoid.
Other Forms of Legal Structures
Other potential legal structures for your eCommerce startup include the following:
If you intend to start an eCommerce business with one or more partners, a partnership structure can be a good option. Partnerships usually allow members to assign various levels of responsibility as well as liability amongst themselves. Partnerships generally work best for joint ventures that involve two or more members sharing business responsibilities. A partnership can also be a good option if your eCommerce business is receiving funding from an investor.
In a corporation, eCommerce business owners are not personally liable for the company's debts and liabilities. This form of business structure allows you to retain the ability to make key decisions while having protection from personal liability. Setting up a corporation requires more time and paperwork when compared to a sole proprietorship or partnership.
High corporations usually involve a lot of paperwork and complex legal requirements, which include name selection and clearances, forming a board of directors, submitting articles of incorporation, creating corporate by-laws, providing shareholder stock certificates, and many other legal requirements.
How to Get Started
Legalizing your eCommerce business as a legal entity is similar to offline businesses. Here is what you should do:
Decide Your Level of Personal Liability
Running an eCommerce business comes with responsibilities. The business liabilities are in different forms but legal and financial liabilities are the most important. Legal liabilities entail the extent to which you're liable for the lawsuits filed against your business. Financial liability entails the extent to which you're liable for the finances of your business. For a startup business, sole proprietorship legal and financial liabilities are acceptable.
After deciding on the liabilities, prepare the necessary documents for business registration. Some of the documents include proof of your identity and address, sole proprietor's PAN card, proprietor's bank statements, security in form of a fixed deposit or a guarantor, and other legal documents.
Create Your Business
There's no specific way of running your business but deciding on the right legal structures will help your business start on the right foot. Aside from choosing the legal structure most appropriate for your eCommerce business, give thought to your order shipping and fulfillment process. At ShipNetwork, we can help you navigate and scale your online business while reliably handling your shipping and fulfillment needs.
Outsourcing to a 3PL Order Fulfillment Company
Now that you know some of the legal structures for an eCommerce business, let us know how we can help you get started immediately. Learn more about our 20 years of logistics and how our order fulfillment services can help you get your products to your customers quickly with fast shipping from multiple fulfillment center locations. As your business grows and you have more inventory to manage, we can handle your logistics needs so you can focus on scaling your business the right way.