Hey Guys, this is Alan Chen with the Free Cash Flow Agency, and I’m a Certified Public Accountant, and first of all thank you for watching this video. In this video, I want to explain to you about the different business structures available to online ecom business owners and then give you my best recommendation for which one to go with.
So let’s get started and if you have any questions anytime during the video, feel free to drop a comment below and I will do my best to give you an answer or even create a video for it if there are enough people who are facing the same issue. So if you guys are just starting out, I bet I can guess what business structure you are – you are a sole proprietorship.
Why do I know this? Because most people when they start a business they just want to feel it out first and see if it will grow before committing.
And that’s actually a very smart thing to do to save a few bucks as you go through the trial and error period.
In general there are 4 Types of Business structures you can form for your business, there is the:
- Sole proprietorship,
- Limited Liability Company Aka LLC.
A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. As soon as you start selling anything with the intent of profit, you are by definition a sole proprietorship. Automatically, you don’t need to tell the government anything, you are this by default. Now you may think oh well it seems pretty nice, I just automatically gained this statue and there’s nothing to file- while this is true, there’s actually a BIG problem we will go over in a few minutes.
Next we have a partnership. A partnership as the name may imply, is when you go into a business with another person. You and your partner both share equal risk and reward for the business. There are different types of partnership, the most common type is the general partnership-and this just means you are equally managing the business with your partner.
This, just like being a sole proprietorship does not require for you to file any kind of paperwork with the state, but what is recommended is you sign a partnership agreement with your business partner so you guys are on the same page as far as how to split profit/loss and how to manage your business.
There’s also another common type of partnership called a limited partnership, this is usually a partner that does not have time to devote to the business, but instead offers monetary investment to the general partner so that they can run the business on their behalf. In any case, with both sole proprietorship and a partnership, there is an important issue: you are liable for ALL the business debts.
That’s right, since there is no separation between you, as a person, and the business, if you are sued or you rack up a ton of payables or debts, the court can take your personal assets (meaning your house or your car) to pay for the outstanding debts.
That’s a big no bueno.
And that’s why this next business structure is the most popular way to set up your online business in the US: an LLC aka Limited Liability Company. Why is it important I become an LLC, what are the benefits?
So LLC is one of the most popular methods when businesses incorporate and the reason is that it offers certain benefits over just operating as a sole proprietorship. One of the most important factors is this crucial concept called… Limited personal liability.
This means that if your business get sued, the extent that they can go after is all your business assets, they can’t go after your personal assets such as your personal home or car- Which if you ask me, it just helps you sleep better at night knowing that. And it is one of the easiest setups in terms of paperwork, and unlike C Corp (which we will go over next) there is no double taxation as all the income is “pass-through” to your personal income tax filings.
Also, there are flexible profit distributions. You guys can choose to distribute the profit however you like no matter how you contribute into the company.
So it’s pretty awesome and if you guys have any questions on how to set this up feel free to comment below and I will try my best to help you guys out.
Now there is one concept I want to warn you guys about and it is called “Piercing the corporate veil”- the concept is basically that if you do not do a very job of separating your personal and business assets, you can be sued for your personal assets as the case can be made there is no separation in your business and personal side.
You don’t want this to happen to you so I highly suggest you start or find someone to help you clean up your bookkeeping leaks and make sure your business side and personal side are entirely separate.
Corporation Or C-Corp
Last, but not least, once your business has grown to a certain stage, you will want to become a full on corporation or a C Corp. A C Corp has many distinct advantages and disadvantages. Some of the advantages include being universally recognized and accepted as a legitimate business, since there is much more complex paperwork and filings you have to do when you are a C corp, you have the most separation between the business and the owner and in general only the business entity itself will be responsible for any loss or liability- it has incredible flexibility as far as shareholder structure and management structure and is basically very attractive as far as if you are seeking venture capitalist money.
Now here’s the downside, a C-Corporation is subject to double taxation. It is taxed at the corporate level and then when the dividends are paid out to shareholders, they are taxed again at the personal income level.
A corporation is more complex to operate than an LLC. The corporation laws require more formalities in how a corporation is managed. For example, shareholder and director meetings are required. Proper notice must be given, and minutes kept. In contrast, LLCs can be managed more informally. Corporation laws also tend to have stricter record-keeping requirements.
There is however a special kind of setup called an S Corp or I like to call it the super Corp. It is basically a hybrid structure that lets you avoid double taxation while still providing the protection of a corporation. It’s pretty amazing and there’s also some other tax benefits to being a S corp, so let me know if there’s interest in this topic and I will make a separate video just focused on this structure.
So all that said, what is my recommendation? I think you guys have a pretty good idea from me going over the pros and cons above, but the most recommended setup for business owners online is the LLC. I highly recommend that as soon as you know your business has the potential to hit 6 figures plus, you immediately look into setting up an LLC.
You want to make sure that when you run your business, you can sleep well at night knowing no one can after your house, car or personal bank account. There’s a lot of resources online on how to set this up and if you guys have any questions, feel free to drop a comment below.
Additionally, if your business is looking for an all in one solution to save on taxes and have amazing bookkeeping done on your behalf, you can click the link in the description and book a free consultation call with FCF Agency, and we will see if we can be a great fit together.
We only want to take on clients we know we can create impact and give them back valuable savings with, so you know if we like you on the call, it’s a great sign.