Launching your business is a challenging and rewarding process. Choosing your name, customizing your site, sourcing your products, and finding your first customers are necessary and often fun parts of running your company.
But does a website and a logo make you “legit”? And, more importantly, do they protect you as a business owner in case something goes wrong?
While it’s not the most glamorous work, business incorporation is the bedrock on which your business is built. When you incorporate your business, you establish it as a legal entity recognizable by the government. Let’s find out what this means, why you should do it, and how to get started.
Your business structure determines how you’re taxed, what your liabilities are, and how you’ll secure funding and capital, among a host of other factors.
There are plenty of benefits to incorporating your business, some of the most important being:
Every business structure offers different benefits for personal liability, ownership, taxation, and funding, among other aspects.
While each business type has benefits, certain types of businesses are better-suited for different company structures. You can also change your business structure as your business evolves over time, though this comes with additional administrative steps.
A sole proprietorship is an unincorporated business without a legal distinction between the company and the individual who owns and runs it. It’s arguably the most straightforward business structure and is simple to set up and manage.
Some new ecommerce businesses with low startup costs and a low risk of liability use sole proprietorships. A sole proprietorship can evolve into another business type later—in fact, it has to if you add to your team—but is the fastest and easiest way to start.
A sole proprietorship qualifies as a non-employer business. These types of businesses have no paid employees, and they’re one of the most common types of businesses in the US. About 40% of small business owners have a non-employer business as their main source of income, while 60% use it as a supplementary source.
Partnerships are single businesses with two or more owners. Each of these owners or partners contributes to the business through funding, property, labor, skill, or something similar. They also share the profits from the company.
There are two types of partnerships:
Partnerships follow a pass-through taxation model. This means the owners are taxed rather than the business. Taxes are applied based on each partner’s income from the business, not the business’s revenue.
A corporation is a legal entity separate from a person, so owners are free from personal liability, except for rare and extenuating circumstances. Instead, a corporation assumes all the risk instead of passing it on to the people who own and run it.
Corporations are also more easily transferred to new owners compared to other business structures. Like other types of business, you file your corporation with your state. Each jurisdiction has its own specific parameters for corporations, but pretty much all corporations are required to pay local, state, and federal taxes, each of which are filed separately from shareholders’ taxes.
In some cases, shareholders of small companies may get taxed twice. Specifically, the corporation will pay taxes on its profits and then the shareholders will pay taxes on their share of the profits in the form of personal income.
A limited liability company, or LLC, is a hybrid business structure, combining the ease of a partnership with the liability protection found in corporations. It’s technically a type of corporation.
Owners, frequently called members, pay taxes on the LLCs profits directly—the LLC itself doesn’t file taxes as a separate legal entity. LLCs with at least two members get the option to be taxed like partnerships or corporations if they prefer. This taxation election eliminates the separation of business and personal taxes.
LLCs are a newer business type, and they’re becoming increasingly popular. According to data from the IRS, while other corporate structures have declined since the 1980s, LLCs have experienced an upward trajectory.
Depending on the state, LLCs may have a limited lifetime. In some jurisdictions, the LLC is dissolved when a member leaves. Ultimately, an LLC is a great business structure for a single founder who is just starting out.
There isn’t an easy answer or formula for every new business to follow when selecting a structure. Many online retailers start as sole proprietorships or partnerships and wait to incorporate when the company’s potential liability makes protecting personal assets attractive or when being able to sell shares of the business would help it grow.
Ultimately, contacting an attorney will be the safest way to decide which business structure is best for you and your company. Here are some things to think about in the meantime.
One of the advantages of business incorporation is that it creates a separate entity from you as an individual. As such, this also reduces your personal risk in many cases. Some business structures offer stronger protections for owners, like a corporation. Others offer less in the way of personal protection, like a partnership. You have to decide how much personal liability you’re willing to take on.
If you’re hiring employees or have plans to, this influences which corporate structure you choose. Sole proprietors, for example, can’t hire employees. So you can start out as an S prop but will need to file to change your business structure if you plan to onboard any staff.
Likewise, if you plan to have a partner in your business, you’ll need to choose a business structure that supports that. So instead of a sole proprietorship, you’ll look to set up an LLC with multiple members, a partnership, or a corporation.
You might come to a point in your business where you need funding for product development, store expansion, inventory investments, or other necessary expenses. There are multiple ways to raise capital for your ecommerce business. But the likelihood of success depends on many factors—one of those being your business structure and history.
When you incorporate, you can build credit and a financial history for your business. Potential lenders, investors, and other sources of capital will look at this information to determine your business’s eligibility for funding. A strong history and credit standing will increase your chances at securing financing and low interest rates.
The actual act of incorporating your business requires a few administrative steps. You can do everything yourself, use an expert’s guidance, or outsource the entire process. If you want to hire an expert, browse through Shopify Experts to find qualified pros and sales tax experts who can help.
At a glance, you’ll need to take the following steps to officially incorporate your business:
For some business owners, where you incorporate is going to be straightforward. If you operate and sell locally, you’ll likely opt for the state where you do business. But if you have plans to sell across the country, and even internationally, there’s more to this decision than you might think.
Each state has its own set of requirements for each business structure, as well as its own application, taxation, and administrative parameters. Check your state’s requirements and apply for your state license here.
Your business name, or a variation of it, will likely be how you’re known to the public. For example, you might refer to General Electric as “GE” but its actual corporate name is General Electric.
If you’re feeling stuck on your name, you can use this guide to choosing a business name to spark some ideas. When you do have an idea you like, perform a search in your state’s database to ensure no one else has claimed it before you.
Your Employer Identification Number, or EIN as it’s commonly known, is a federal tax ID. It functions similarly to how your Social Security number functions—you use it when you file paperwork and taxes with the government. This is how the government identifies your business. You need your EIN to incorporate your business.
To register for your nine-digit EIN, all you have to do is fill out this form on the IRS website. You’ll get your EIN immediately.
Once you have your EIN and a chosen name, you can file the paperwork with your state to make it all official. If you’re filing a corporation, you’ll need to include articles of incorporation with this application. Essentially, all of this administrative paperwork contains information about your company, its founders/partners/members, and its shareholders. These documents make your business official.
Incorporating your business makes it official in the eyes of the government. You’ll protect your personal assets, build credit and history for your company, and even enjoy lower taxes in some cases. But the best benefits of business incorporation are perhaps intangible. Incorporation transforms your idea into a real, official business—the rest is up to you.
The four types of business structures covered in this post are:
The best type of business entity depends on your unique business needs. This post guides you through the types of businesses and how to choose the best one for you.
