How to choose the right business structure for your ecommerce company

Choosing a business structure is an important decision—your business structure impacts everything from your ability to take out loans and grants to how much responsibility you’ll have to take on when paying for liabilities incurred by your ecommerce business.

The U.S. Small Business Administration (SBA) recommends that you “choose a business structure that gives you the right balance of legal protections and benefits.” Additionally, your business structure determines the type of income tax return (or returns) you’ll file.

In this article, we’ll explore the details you should know before choosing a business structure, the pros and cons of each entity type, and the many factors to consider before making your decision.

When choosing a business structure, the best decision is an educated one. The decision is best made with the counsel of an attorney, accountant, and any other law, business, or tax professionals who can analyze your unique situation and offer specific advice that will set you up for success.

A note on limited liability

As we explain the characteristics of each business entity type, a term we’ll reference often is limited liability.

Limited liability refers to the amount of personal liability you’re likely to carry for business liabilities. This liability is limited, which means that your personal assets, like cash, stocks, homes, cars, and boats, are protected from seizure in instances where your business can’t pay its own liabilities.

For example, let’s say your liability limit in your business is $10,000 and the company owes $150,000 on a lawsuit. If the company is not able to cover the cost, then you should only be potentially liable for $10,000 on that suit, due to the protection of the liability limit.

Below, we’ll dive deeper into different types of business structures and offer insights into the type of company that should work for your needs.

1. Sole proprietorship

Sole proprietorships are a single-person business entity type. This is the default business entity if you begin commerce without registering with the state as a business. There is no limited liability for sole proprietorships. Business taxes are paid on your personal income tax in a process called pass-through taxation.

Typical profiles

• Hobbyist-turned-business that sells to a narrow market
• Hyper-local business that relies on immediate surroundings for supply and/or demand
• Occasional or seasonal business that only operates in some parts of the calendar year
• New entrepreneurs testing out if their business is viable on a controlled market

Advantages

• Simplicity: Once you start selling something, you’re considered a sole proprietor. No registration or paperwork is required. Similarly, if you stop selling your product or service, your business is considered effectively closed. 
• Low cost: Sole proprietorships cost nothing in terms of filings, registration, or other paperwork to open and run. The only costs are the cost of goods sold (COGS), labor, and other direct business expenses. 
• Low risk: Because starting up as a sole proprietorship is so straightforward and low-cost, it’s less of a risk to experiment with your product or service. You can be innovative with your offering or try to enter new markets. 
• Pass-through taxation: You’ll pay small business taxes on your personal income tax filing when you operate as a sole proprietor. Depending on your company’s current size, this can be cheaper than paying tax as a separate business entity. Corporate tax rates are generally much higher than personal income tax rates.

Drawbacks

• Greater personal liability: Sole proprietorships offer no limited liability protection, which leaves your personal assets vulnerable if your business encounters liabilities like a lawsuit or an overdue loan repayment.
• Lower growth ceiling: Less formal business structures aren’t designed to support scale. If you’re hoping to grow well beyond what a sole proprietorship can offer, be prepared for the paperwork, money, and time it will take to change business structures down the line.
• No tax benefits: There aren’t any tax detriments to operating as a sole proprietor, but there also aren’t any benefits—if you’re hoping to cash in on business tax perks, a sole proprietorship might not be what you're looking for.

Tax return filed:

• Form 1040 (U.S. Individul Income Tax Return) with a Schedule C (Profit or Loss from Business)

Tips

• Keep records: If your sole proprietorship develops into a thriving business and you want to transition into a different business structure to support its growth, the records you have from your sole proprietorship era will help legitimize your new business venture to customers and financial service providers. 

Examples:

Many individuals who sell products through Etsy or promote their online stores through a platform like Instagram operate as sole proprietors. Creative professionals selling artwork or handmade goods often choose the sole proprietor model since the setup is straightforward and the individual retains full control over the business operations. 

2. General Partnership

Partnerships are made up of two or more people, are not registered with the state, and do not provide their owners with limited liability. Taxes are paid on your personal income tax via pass-through taxation. There are two types of partnerships: general and limited.

A general partnership splits business operations and profits between all partners, including profits, losses, and debts. In a limited partnership, general partners handle operations. Limited partners are more hands-off but still contribute to and benefit from the company’s profits.

Typical profiles

• Hobbyist-turned-business that sells to a narrow market
• Hyper-local business that relies on immediate surroundings for supply and/or demand
• Former coworkers banding together on a new venture
• Family members and/or spouses running a family business together

Advantages

• Lower financial burden: Most partnerships have multiple partners financially invested in the company (rather than just one of the partners). With this shared investment, you can choose to invest less capital into the company, which in turn can lower your financial risk. Keep in mind that lower financial investments are not always possible. 
• Greater collaboration: Having another smart person on your team, especially an individual who is as invested in your company’s success as you are, widens the scope of your vision on important product, workplace, and business decisions, like whether to hire someone or start working on a new product. 
• Low risk: Like sole proprietorships, partnerships have a relatively low barrier to entry. Your partnership begins as soon as commerce occurs or if you get anything in writing before commerce. This also means that a partnership is just as simple to dissolve and relatively low-risk to start. 
• Shared responsibility: The operations of a business take time and mental energy to experiment with and refine. You may have to make important decisions every day, from defining your company’s cultural values to deciding on a payroll service provider. Having someone else to share the responsibility with allows partners to rest and focus on what’s important. 

Drawbacks

• Greater personal liability: As with sole proprietorships, partnerships offer no limited liability to business owners. This protection is exclusively offered to LLCs and corporations. Your personal assets can be seized if your business is unable to repay a liability. 
• Co-opted liability: In partnerships, you’re liable for any actions taken by your business partner. Be sure to partner with someone you trust to make decisions in everyone’s best interests, both on and off the clock.
• Lower personal income: If your new company is a small business operating informally enough to be a partnership, chances are that your revenue streams are not flowing steadily yet. The result is that you’re splitting razor-thin profit margins between two people. Decide whether a lower personal income is something you can afford.

Tax return filed:

• Form 1065 (U.S. Return of Partnership Income)
• Form 1040 (U.S. Individul Income Tax Return) with a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.). Each partner has to file.

Tips

• Get a lawyer: Partnerships are often conceived from pre-existing relationships, including friends, family, or coworkers. Legal supervision over business agreements sometimes gets skipped. Getting a lawyer to ensure all partners are protected in emergency circumstances isn’t a sign that you distrust your partners; it’s a way to show that you’re prioritizing everyone’s best interests.

Examples:

A duo that goes into business together (a married couple or co-founders) might opt for a general partnership. The business formation is less complex than a corporation, but the partners have to accept personal liability for any debts or legal actions against the business.

3. Limited Partnership

A limited partnership (LP) is similar to a general partnership. The difference is that it includes at least one general partner and one or more limited partners. The general partner (or partners) manages daily operations and has unlimited liability for the partnership’s debts. Limited partners may contribute capital and share in the profits, but their liability is limited to the amount of their investment. 

This type of entity is used when passive investors want to fund a business, but aren’t interested in participating in the company’s management. Limited partnerships are less common in e-commerce businesses.

Typical profiles

• Real estate investment groups that pool resources from limited partners to invest in property developments
• Private equity funds that raise capital to invest in companies
• Law firms that want to manage liability and profit sharing

Advantages

• Access to capital: LPs can receive investments from individuals who aren’t interested in active involvement. The capital allows the business to take on larger projects.
• Limited liability for investors: Limited partners’ risk doesn’t exceed their investment amount. This protects their personal assets from business debts. 
• Pass-through taxation: Profits and losses pass through to partners’ personal tax returns. This type of taxation can avoid the double taxation that corporations face. 

Downsides

• Unlimited liability for general partners: General partners are personally liable for all business debts and other obligations. This can create significant financial risk.
• Limited control for limited partners: Limited partners can’t participate in management decisions, in order to maintain their limited status. This might be less appealing to some investors.
• Complex entity formation: Establishing an LP requires formal agreements and are more complex than forming a sole proprietorship or general partnership. LPs must also comply with state regulations to maintain good standing and protect their limited liability status.

Tax return filed:

• Form 1065 (U.S. Return of Partnership Income)
• Form 1040 (U.S. Individul Income Tax Return) with a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.). Each partner has to file.

Tips

• Draft a comprehensive partnership agreement outlining roles, responsibilities, and profit sharing. The agreement should also include procedures for resolving disputes between partners.
• Maintain open lines of communication between general and limited partners to ensure alignment on business objectives. 

Examples:

Venture capital firm Sequoia Capital and Andreessen Horowitz (the fund, not the firm) operate as Limited Partnerships. These venture capital companies have invested in many startups, including ecommerce companies. 

4. Limited liability company

Limited liability companies (LLCs) are registered with the state government. The business entity is registered by filing forms called articles of organization. There are annual reports and costs associated with maintaining LLCs and your personal assets are protected from business losses by limited liability. The company is taxed on your personal income tax via pass-through taxation.

Typical profiles

• Growing companies that are looking to hire their first employees
• Funded businesses ready to loan
• Sole proprietorship or partnership profiles who want limited liability protection

Advantages

• Protected personal assets: When you form an LLC, you create a business entity distinct from yourself. This provides your personal assets with limited liability, protecting your bank accounts, boats, cars, homes, or properties from seizure. With limited liability, if your company owes money it can’t pay back, you won’t have to pay out-of-pocket to cover the difference. 
• Operational flexibility: LLCs are more structured than sole proprietorships or partnerships, but they still allow you to design your business operations however you would like. Unlike corporations, there aren’t stringent requirements for aspects like a board or certain compliance evidence. You simply write your operating agreement and go for it. 
• Flexible taxation: By default, LLCs are taxed as pass-through entities. However, an LLC can also opt to be taxed as a C corporation or a Sub S corporation. This gives you the flexibility to choose the tax filing that is most appropriate for your unique circumstances. If the LLC has at least two members, it is classified as a partnership.
• Member-owned: Members of an LLC are the owners of the LLC, and are typically involved with the company’s day-to-day dealings. This means that everyone who owns the company contributes to its growth. Members will usually have a sense of personal responsibility to support the business’ success, which can lead to a culture of teamwork as well as more successful business outcomes.

Downsides

• Not as investor-friendly: If you’re interested in raising funding for your business from angels, venture capitalists, or investment firms, LLCs aren’t the right choice. Legally, many investors can’t invest in anything but corporations. Other investors simply don’t like to invest in LLCs because of the structure’s operational flexibility, which makes these companies—and returns on investment—less predictable. 

Tax return filed:

• Form 1040 (U.S. Individul Income Tax Return) with a Schedule C (Profit or Loss from Business) for single-member LLCs operating as a pass-through entity
• Form 1065 (U.S. Return of Partnership Income) and Form 1040 (U.S. Individul Income Tax Return) with a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) if the LLC has multiple members and doesn’t elect to be taxed as a corporation. Each partner has to file a Schedule K-1.
• Form 1120S (U.S. Income Tax Return for an S Corporation) with a Schedule K-1 (Shareholder’s Share of Income, Deductions, credits, etc) for LLCs operating as a Sub S Corporation. Each shareholder has to file a Schedule K-1. 
• Form 1120 (U.S. Corporation Income Tax Return) for LLCs operating as a C corporation. 

Tips

• Don’t rush the paperwork: With all the freedom involved in LLC structures, it can be easy to miss important clauses when drafting your operating agreement. Make sure each founding member runs the contract by lawyers and peers before it’s signed.

Example:

Uncommon Goods, LLC is a Brooklyn, NY-based online retailer offering a variety of unique and creative products. Founded in 1999, today, Uncommon Goods has 150 employees and an estimated revenue of $139 million per year.

5. Low-profit limited liability company (L3C)

Low-profit limited liability companies (L3C) are a hybrid of an LLC and a non-profit. They were first created in 2008 to comply with IRS rules around program-related investments, allowing private foundations to invest in L3Cs and maintain their tax-exempt status. 

Unlike a non-profit, L3Cs are permitted to generate profits. However, their primary goals must be charitable, educational, or have a social mission. Their secondary goal is to generate profits. 

Only certain states have statutes that recognize L3Cs. These include: Illinois, Louisiana, Maine, Michigan, Missouri, North Dakota, Rhode Island, Utah, Vermont, and Wyoming. 

If you have a mission-driven ecommerce company, an L3C might be a viable option, but only if you form an entity in a state that will recognize it.   

Typical profiles:

• Businesses that aim to address social issues while operating with a sustainable revenue model
• Companies with environmental initiatives, such as conservation or renewable energy
• Entities that promote arts, culture, and community engagement

Advantages:

• More funding options: L3Cs can secure investments from private foundations through PRIs. Operating as an L3C can attract partners and investors with similar values. 
• Operational flexibility: The L3C allows for management and operational pratices similar to those of traditional LLCs. 

Downsides:

• Legal recognition: Since L3Cs are not recognized in all states, they may face challenges gaining recognition and understanding from investors. 
• State-specific recognition: It can also be more of a hassle to get your business registered, since you’d have to register in a state that recognizes L3Cs. The lack of recognition can also complicate your business operations across state lines.

Tax return filed:

• Same as an LLC, which is dependent on the taxation status (single-member LLC, partnership, Sub S corporation, or C corporation)

Tips:

• Clearly define the mission of your L3C in your operating agreement to align with IRS requirements for PRIs.
• Consult with legal professionals who have experience in L3C formation and can navigate the state-specific laws and IRS regulations.

Example:

Overflow Coffee Bar in Chicago, IL operates as an L3C. Founded in 2018, Overflow has a mission to “add value to the world with community engagement and an exceptional coffee experience.”

6. Series LLC (SLLC)

A Series LLC (SLLC) is a business structure that allows a single “parent” or “umbrella” LLC to establish multiple LLCs, each with its own assets, liabilities, members, and operations. Each series functions independently. Businesses looking to segregate assets and liabilities across different ventures or product lines find an SLLC attractive, since they can do so without forming multiple, separate LLCs. 

SLLCs were first created in 1996 and are recognized in Delaware, Illinois, Indiana, Iowa, Montana, Nevada, Oklahoma, Tennessee, Texas, Utah, and Wisconsin. 

Typical profiles:

• Ecommerce companies with diverse product lines 
• Franchise operators wanting to assign each location to a separate series
• Real estate investment firms wanting to hold each property in a separate series

Advantages

• Asset protection: Each series operates independently, which shields the assets of one series from the liabilities of another.
• Cost efficiency: Forming a series LLC can be more cost-effective than establishing multiple, separate LLCs. The organization would have fewer filing fees and lower administrative expenses.
• Operational flexibility: Each series has its own members, managers, and business objectives, allowing distinct management strategies within the umbrella LLC.

Downsides:

• Legal uncertainty: Not all states recognize series LLCs, which may impact the enforceability of liability protections within the series. This can create legal complexities when operating across state lines.
• Tax complications: The IRS has not provided comprehensive guidance on the federal tax treatment of SLLCs.

Tax return filed:

• The IRS treats an SLLC as a single entity. The SLLC is therefore taxed as an LLC, which is dependent on the taxation status (single-member LLC, partnership, Sub S corporation, or C corporation)

Tips:

• Consult with legal and tax professionals who are familiar with SLLCs to navigate the complexities associated with this structure.
• Maintain distinct records, bank accounts, and financial statements for each series to reinforce the separation of assets and liabilities. 

Example:

An ecommerce entrepreneur selling electronics, apparel, and home goods might establish a Series LLC with a separate series for each product category. This allows for the efficient segregation of assets and liabilities, protecting each series from the liabilities of the others. 

7. Sub S Corporation

A Subchapter S Corporation (also known as a Sub S corporation or S corp) is a special tax designation that allows corporations to pass income, losses, deductions, and credits directly to their shareholders. The corporation itself does not pay income taxes, avoiding double taxation. Instead, income is taxed at the shareholder level. 

A Sub S corporation combines the legal structure of a corporation with taxation similar to partnerships. 

Typical Profiles:

• Small to medium sized businesses (Sub S corporations must have fewer than 100 shareholders)
• Businesses that want to avoid the complexities of a C corporation and receive favorable tax treatment

Advantages:

• Profits and losses are reported on shareholders’ personal tax returns, avoiding double taxation
• Since Sub S corporations are first formed as LLCs that elect to be taxed as a Sub S corporation, shareholders’ personal assets are protected from business debts and liabilities
• Shareholders can be employee,s which may result in payroll tax savings

Downsides:

• Sub S corporations are limited to 100 shareholders, all of whom must be U.S. citizens and individuals (with some exceptions for entities like trusts)
• Sub S corps can only have one class of stock, which limits flexibility in profit distribution
• The entity must follow operational requirements, such as holding regular meetings and maintaining corporate minutes

Tax return filed:

• Form 1120S (U.S. Income Tax Return for an S Corporation)
• Form 1040 (U.S. Individul Income Tax Return) with a Schedule K-1 (Shareholder’s Share of Income, Deductions, credits, etc). Each shareholder has to file. 

Tips:

• Ensure your business meets IRS requirements for Sub S corp status, including shareholder and stock limitations.
• Get advice from legal and tax professionals to determine if Sub S corp status aligns with your business goals. These professionals can also help you navigate the process of forming an LLC or partnership that elects to be taxed as a Sub S Corp. 

Example:

The S corp structure is a popular choice for small businesses. A company operating an online retail store might elect S corp status to combine the tax advantages with personal asset protection.

8. C Corporation

C Corporations are state-registered businesses formed by filing articles of incorporation. There are annual reports, meetings, and costs associated with the maintenance of a corporation, as well as operational requirements such as having a board of directors. Your personal assets are protected from business losses by limited liability. The company is taxed as a distinct entity, so it pays income tax completely separate from its owner.

Typical profiles

• LLCs which are outgrowing their current business structure
• Venture capital-funded companies like startups

Advantages

• Protected personal assets: As with LLCs, a corporation can protect your personal assets from seizure if there is a business liability that the company can’t pay for. This protection isn’t a failsafe but can act as an added layer of protection. 
• Greatest corporate power: When your company is registered as an entity, it’s able to take actions independent of you, including opening a business bank account, accepting business loans, suing and being sued, and paying taxes. Your company is also governed by corporate laws which are custom-built to protect businesses. Plus, your personal identity is protected from any lawsuits, e.g. Their Company versus Your Company instead of Their Company versus You Individually.
• Tax benefits: There are corporate tax laws that help corporations benefit from their contributions to the economy in the form of credits. For example, hiring employees for your corporation is considered job creation. The government rewards job creation with tax credits because increased employment is seen as serving the state’s and country’s economic statuses (and reputations). 
• Investor-friendly: Investors tend to prefer corporations. Because corporations are highly regulated business structures, they're less volatile than structures like LLCs. This predictability makes it more likely for investors to receive a return on investment. Additionally, some investors are required to invest only in corporations and not other business structures.

Drawbacks

• Strict, pricy operations: Corporations need to have a board of directors, annual shareholder meetings, quarterly estimated tax payments, and more. These requirements make for investor-friendly environments but can feel limiting and expensive for entrepreneurs.
• Higher risk: Registering a corporation is a near-permanent decision that requires upfront capital, long-term capital, contracts, and adherence to a long list of operational requirements. These businesses can be harder and more costly to dissolve than other types, which makes starting up a higher financial risk.

Tips

• Keep a few backup names: There are millions of businesses in the United States, and it’s best to plan for the worst. Enter the incorporation process armed with a few alternative name options for your company. Better yet, try and make sure your name is very distinct from the start.

Example:

Online retailer Wayfair operates as a C corporation. As a publicly traded company, it must be structured this way to issue multiple classes of stock, attract investors, and comply with SEC regulations. Many large ecommerce companies operate as C corporations for similar reasons: access to venture capital, ability to issue stock options, and more robust governance structures.

Your business structure impacts its taxation, operations, management, costs, maintenance, and investment viability. Here are some details to keep in mind when deciding which structure to choose.

• Cost: Starting a business always costs money, but some structures cost more than others and have different payoffs. For example, corporations are more costly to start and maintain than sole proprietorships, but have greater growth potential.
• Growth: Sole proprietorships and partnerships are easy to start but have limited growth potential. On the other hand, corporations are hard to start but have huge growth potential. Choose a structure that aligns with your business growth and scale goals.
• Market: Corporations and LLCs are more capable of serving customers across geographies, verticals, and demographics than sole proprietorships and partnerships. ‍
• Your commitment: If you’re running a side hustle with the goal of increasing your pocket money, the tedious paperwork and maintenance of a corporation might be more than you need or realistically want.

On the other hand, if you’re trying to turn your business into a full-time venture, a more complex business structure and the strenuous maintenance schedule that comes with it will be worth it. Consider how much time, effort, money, and mental energy you’re willing to offer your business, and build a strategy from there.

Each business structure supports different goals. As always, be sure to also check in with a lawyer, accountant, and other business professionals for the most personalized advice.

What is the easiest business structure for an eCommerce business?

The easiest business structure is to operate as a sole proprietor, because you do not need any formal business registration or separate tax return filing. 

What is the best business structure to protect personal assets?

The best business structure to protect business assets is to operate as a limited liability company, general partnership, or limited partnership. Your assets are shielded from the liabilities of the business, without the complexities of a C corporation. 

What’s the difference between an LLC and an S-Corp?

An LLC can opt 

Can I change my business structure later?

Yes, you can change your business structure. For example, you can form an LLC and later opt to be taxed as a Sub S Corporation. 

Do I need a business structure if I sell on Shopify, Amazon, or Etsy?

You do not need a formal business structure, as sole proprietors are allowed to sell on Shopify, Amazon, and Etsy.

What business structure has the lowest taxes?

Sub S corporations have the lowest taxes, since there is no tax on the corporate income.

What state should I register my eCommerce business in?

Consult with a legal professional about the best state in which to form an entity. If you want to form a Series LLC or L3C, you need to register in a state that recognizes that entity. 

Which business structure is best for raising an investment?

Many investors will only invest in C corporations since these entities allow multiple classes of stock and unlimited shareholders.

What is a holding company, and should I use one for my eCommerce brands?

A holding company is an entity that owns shares or interests in other companies, but doesn’t conduct any business itself. If you have multiple product lines and a Series LLC isn’t available in your state, a holding company is another option.