Internet Business Entity Choice

In terms of the typical e-commerce startup, new entrepreneurs usually want to know whether they should form a corporation or LLC. Internet business attorneys often recommend forming an LLC and then elect S-corporation status to maximize tax benefits. Businesses with multiple owners can combine the flexibility of using an LLC with the tax advantages of an S-corporation. The certainties of electing S corporation status and paying only payroll taxes on wages the company earns can be a clear benefit. Of course, this is a blanket statement and there may be other reasons to form an S corporation outright instead, or some other business entity. Generally speaking, most startups will have little reason to form a C corporation.

The LLC still must comply with S corporation ownership rules. This means a single class of ownership, no non-resident alien members, and no corporations or partnerships can be members. This structure may not work entirely depending upon your ownership structure.

But, the same basic principles of choosing a business entity are no different for conducting e-commerce. My breakdown of corporations vs. LLC’s provides a detailed breakdown of the pros and cons of each structure.

First, the LLC has far less corporate formalities to follow.  This basically means there will be less hassle and paper work involved with using an LLC (for instance you do not need a board of directors or need to conduct annual meetings). If you use a single member LLC, you will be classified as a sole-proprietor for tax purposes and pay self-employment taxes on all income. If you make the S election, you will end up being a single member LLC that is taxed as an S-Corporation. This gives you the power of being the only owner without the tax penalty of being declared a sole proprietor.  If you are the sole owner in an S corporation tax structure, you will be a W2 employee as opposed to self-employed. You  are still encouraged to speak to a qualified accountant to learn more. One thing to consider is that creditors may not be limited to seeking a charging order against a debtor using a single member LLC.