Online Business and Incorporation in the USA

When is the right time to incorporate if you have an online business?

It is important to know when is the right time to incorporate and when you reach that point which of the business structures to choose.

Please use this as general information, not as legal advice. It is provided for informational purposes only. If you are considering incorporation, we encourage you to work with a legally qualified professional in your jurisdiction.

The right time to incorporate is not always the time when you start selling. Sometimes, it’s worth keeping it simple, with no entity, no tax filings, no extra fees. The time to incorporate needs to be well considered and discussed with a lawyer who can help you take the best decision.

First you need to know why corporations exist and why you should incorporate eventually. 

  1. To protect the owner by providing a limited liability (which depends and is not always possible)
  2. Incorporation is a way to have multiple owners of a venture
However, if the business has only ONE OWNER the decision to incorporate should be taken based on how much money your business makes and do you need to sign contracts with third parties?

The main business structures in the USA are: 

  • Sole proprietorship
  • General partnership
  • Limited liability partnership
  • Limited liability company
  • Corporation

LLCs and Corporations are the two most used options for online businesses

Limited Liability Company (LLC)

 Some of the benefits of an LLC are (if you are an online business owner this is the better option for you):

  • It is the simplest and the most flexible business type to maintain.
  • It gives you the opportunity to reserve a business name and create your own brand.
  • It gives the owner limed liability for the business’ debts and obligations. (As I mentioned above, it is not always possible to limit your liability a 100% if you are a single member)
  • It is a great option for partnerships. It protects each partner from the actions of the other.
  • It is a pass-through entity for tax purposes. Profits are not taxed at the entity level but are instead passed through to members and taxed on an individual basis, thus avoiding the double-taxation.
  • It does not restrict ownership. The owner may not be a US Citizen/ US Resident.
  • It can be converted to an S Corporation

It is very important for the LLC owner to know how to treat the LLC and keep its books separately from the personal books. It is important to treat your LLC as a corporation, so you can receive the same type of protection.

Corporation (S Corporation and C Corporation)

First, what is the difference between S and C Corporation? The answer is: Taxation. The S Corporation provides owners with a different way of being taxed compared to a C corporation.

C-Corporation

For the online small business owners having a C Corporation is not a good option, because of the double taxation. However, if you are not a US Citizen / Resident and you want to form a Corporation, you have no choice but to use this type of business structure.

S-Corporation

The two (2) main benefits of having an S Corporation are: (the best option if you are a US Citizen and want to use the tax advantages of it)

  • The tax savings
  • The protection it provides to its owners

 The disadvantages of the S-Corporation are:

  • The maintenance of the S Corporation is more complicated than that in the LLC
  • The fees you will have to pay to maintain it does not make sense if you are a small online business owner

The type of the business you choose depends solely on what your needs are and the vision you have for your business.

Every online business should incorporate at some point.

- Renata Valkova

Find out
when is the right time 

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