TYPES OF BUSINESS ENTITIES FOR E-COMMERCE

You are set to begin your eCommerce business. You have created your business plan, chosen the products that you would like to sell, and even have investors and vendors ready to begin. But there’s still one major consideration that you have, which is if you should register your eCommerce business.

The short answer is “yes.” Before deciding on the business entity to go for, you need to know the types of business entities and their pros and cons for your business.

Types of Business Entities

There are majorly four types of incorporations in the United States. They are designated as;

1. C Corporation
2. S Corporation
3. Limited Liability Company (LLC)
4. Nonprofit Organization

C Corporation

C corporation is known to be any corporation that is taxed separately from its owners under united states federal income tax law. C corporation is differentiated from an s corporation, which is not usually taxed separately.

A majority of companies (and many smaller companies) are dealt with as c corporations for u.s. federal income tax purposes. C corporation generally has no limit on the number of shareholders, domestic or oversee. Distributions from a c corporation’s profits and earnings are generally treated as a dividend for u.s. income tax purposes.

There are exceptions to handle certain distributions as made in exchange for stock rather than as dividends. Such exceptions are focused on distributions in full termination of a shareholder’s interest and distributions in the corporation’s liquidation.

Advantages of C Corporation

1. C corporation is separate from its owners- C corporation has its own life, with its own capabilities, rights, liabilities, and responsibilities once it is formed. It can sue and be sued.
2. C corporation provides owners with limited liability protection- The exposure of the shareholders to loss is limited to the amount invested in the corporation.
3. C corporation has perpetual existence- Once a corporation is formed, it remains in existence until it is dissolved, wound up, and liquidated, except its articles of incorporation state otherwise.
4. C corp shares can be transferred freely- A shareholder can freely sell his/her shares, and the buyer will become the shareholder with all of those rights.
5. C corporations are more attractive to investors- One positive feature of a C corp is that it has an easier time enticing investors, including securing capital through equity financing.
6. No restrictions on shareholders- Unless the corporation’s governing documents state otherwise, there are no constraints on who can own a C corporation stock.
7. Management of the corporation is not by shareholders- C corporations are managed by a board of directors who elect the officers who run the day to day operations.

Disadvantages of a C Corporation

1. C corporation is a complex entity- C corporation is more complex to manage than an llc. The corporation laws require more formalities in how a corporation is operated. Minutes of the meeting must be taken.
2. Double taxation- C corporation pays its shareholders dividends from its after-tax income. The shareholders will now have to pay personal income taxes on the dividends.

S Corporation

S corporations are known as corporations that elect to pass corporate losses, deductions, income, and credit through to their shareholders for the purposes of federal tax.

Like a c corporation, an s corporation is normally a corporation under the law of the state in which it is organized. For federal income tax, taxation of s corporations can be likened to that of partnerships.

The income from an s corporation is not taxed at the corporate level but the shareholder level.

Payments made to shareholders by the corporation are distributed tax-free so that the disseminated earnings were not previously taxed.

an S corporation is free from penalty taxes like; personal holding company, accumulated earnings tax, and the alternative minimum tax.

for an election to be considered as an s corporation, the following requirements must be met:

• Must be an eligible entity that has elected to be taxed as a corporation.
• Must have only one category of stock.
• Such an entity must not have more than 100 shareholders.

Advantages S Corporation

1. There exists limited liability for management and shareholders.
2. It can have unlimited management with no state residency requirements.
3. Distinct, court-recognized existence. You can’t lose your personal assets
4. Profits made are distributed to the shareholders, who are then taxed based on profits individually.
5. There is privacy protection, especially in Nevada and wyoming.

S corporations are favorable to businesses that:

• Will offer a service (like consultants, E-Commerce).
• Will not require high start-up costs.
• Will not need to carry out major equipment purchases before starting operations. This is great for an E-commerce company.

 

Disadvantages of S Corporations:

1. Shares are subject to sale and seizure in court proceedings at the shareholder level
2. It does not allow for more than 100 shareholders, all of whom must be residents of the U.S.
3. Tax-free benefits cannot be received by owners/employees holding 2% or more of the company’s shares.
4. Since flow-through taxes will be paid at the personal rate, it is expected that high-income shareholders will pay more taxes on their distributions.
5. It is not desirable for an estate planning vehicle since control is ultimately in the stockholders’ hands.
6. It is not suitable to hold appreciating investment. Gain on sale of assets will incur greater taxes than with other pass-through entities like LLC and limited partnerships.
7. Limited to one class of stock only.

Limited Liability Company (LLC)

An LLC is generally a flexible form of enterprise that mixes components of partnership and corporate structures. It is a legal kind of company that offers limited liability to its owners in the vast majority of United States jurisdictions.

One major characteristic an LLC shares with a corporation is limited liability, and it also shares a primary character with a partnership through the availability of pass-through income taxation.

An LLC is generally more flexible than a corporation, and it is a good fit for companies with a single owner.

Advantages of LLC

1. Tax advantage; No double taxation- The law regards the income of a limited liability company as the income of its owners/members.
2. Income distribution is flexible- A limited liability company is flexible in terms of the distribution of profits of the business. Profits can be distributed based on who puts in more effort. The person gets a higher share.
3. Easy to set up and manage.- Another advantage of limited liability companies is that they are generally easy to set up and run than corporations. No need for articles of incorporation.
4. It is controlled and managed by members- The owners or members of a limited liability company have the advantage of controlling or managing the business directly.

 Disadvantages of a Limited Liability Company

1. It is difficult to raise capital- A limited liability company has the same two sources of raising capital as a corporation: equity and debt. Limited liability companies are well known, so it becomes difficult to convince a potential investor to invest.
2. Confusion across states- Limited liability companies are normally registered with states and not federal agencies, and different states will have different regulations governing such companies.
3. No perpetual existence- The majority of the U.S. states mandate the founders to set a limit for the company’s existence. Even if such a clause is absent, a limited liability company will cease to exist in the event of death or withdrawal of a member from the company.

Nonprofit Organization

A nonprofit organization is an entity that makes use of surplus revenues to achieve its goals instead of distributing them as profit or dividends. While not-for-profit organizations are permitted to raise surplus revenues, the organization must retain such revenues for its expansion, self-preservation, or plans.

Advantages

1. Employee commitment – The majority of the employees who work for nonprofits have a personal interest in and commitment to the organization’s cause.
2. Intrinsic rewards- The services that nonprofit organizations offer to communities and segments of the population are often overlooked or underserved. Most times, nonprofits and their employees reap intrinsic rewards from the satisfaction of clients and community members who cannot fend for themselves.
3. Financial benefits- An organization with nonprofit status, particularly those recognized at the federal level by the IRS, can take enjoy tax and financial benefits:

• When the donations to an organization are tax-deductible, donors have an incentive to contribute.
• Nonprofit organizations are sometimes given favorable terms and discounts by service providers and retail companies, and landlords.
• IRS-recognized nonprofit 501(c)(3) public organizations do not have to pay corporate income tax.

4.  Protection from personal liability- As a nonprofit, incorporation can shield founders, officers, and workers from personal liability for the organization’s debts, lawsuits, and fines.

 

 Disadvantages:

1. Limited funding- Fund development and fund-raising are usually a nonprofit organization’s greatest challenge, particularly during the harsh economic situation and when the country’s unemployment rate is high.
2. The public scrutinizes them- The financial statements of nonprofit entities are generally subject to public scrutiny. A nonprofit organization must make its financial statements available to the general public:
3. Social pressure and discouragement-Potential backlash and social fracas befall some nonprofit organizations whose activities are considered extreme. Such pressure is usually discouraging.

 

Final Recommendation

For U.S Residents

Looking at the facts about the types of incorporations we have. We recommend that S corporation for those that want to establish an e-commerce business in America. This type of corporation can be legalized in the u.s. successfully. And it is good for businesses that do not require large capital for a start-up or purchase large equipment to operate.

For Non-U.S. Residents

If you are a non-u.s. resident, you should consider looking at incorporating at your home country for easier tax management but you need to check if your country has an tax agreement with the US  so you don’t pay double tax. If you decide to open a US-based company as a nonresident, then running an LLC or a c cooperation would be your best options.