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eMarketing In-a-Box: How to Attract, Retain and Monetize Your Website Customers Copyright 2007 All Rights Reserved
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Chapter 2                                

Choosing Corporate Structure
for your E-Business


Business Law Basics

Too many small businesses – and especially, online businesses -
begin operations without first thinking through their corporate
structure. We’ve seen it all too many times. You have wild success
in business, only to be sued by someone that blindsides you
because you didn’t take the time to fill out the simplep aperwork
and spend the little bit of money necessary to ensure that you limit
your liability.

This is especially important if you want to do business online where many competitors can be unscrupulous
and new laws such as CAN-SPAM (Controlling the Assault of Non-Solicited Pornography And Marketing Act
of 2003), which was designed to limit email spamming) are popping up continuously in order to regulate the
Wild West of the Web.

So we’ll spend a little bit of time on this subject since it’s so important.

There are several legal issues you should look into when beginning a new business. Make sure you review
your legal needs, including; trademarks, patents, copyrights, doing-business-as (DBA)/business names, and
even personal legal issues that may impact your business, such as: divorce situations, wills, prenuptial
agreements, power of attorney, and wills.

For these legal issues, we recommend that you use the service that you can find now by clicking here or by
checking out the Online Legal Resource that we suggest at www.WhatWeSuggest.com.

One of the most important issues that you should handle first is deciding your corporate structure. For our
recommendation on which company to use for this service, click here or check out the Online Business
Incorporation Service we have listed at www.WhatWeSuggest.com.


Choosing a Corporate Structure that’s Right for You

One of the most common questions we get is: Should I set my company up as an LLC (Limited Liability
Company) or a regular corporation or just start as a sole proprietorship?

As you’ll see, 90% of the time, we recommend you taking the time and spending the money to set up an
LLC, but, as with everything in business – and in life – the one right answer is: It all depends.

It depends on your risk tolerance, the nature of your business, your financing structure, and many other
issues.
For starters, ask yourself the following questions:

  • Do you need financing beyond what you can invest yourself or what you can get from friends, family, and
    your bank? That is, do you want investors as shareholders in your company?

  • Do you want to maintain full control of your company or are you willing to give up some control in
    exchange for investments from others?

  • Do you want to avoid double taxation, that is, at the corporate level and then at the individual level?

  • Are you willing to live with the risk of liabilities that may arise from your doing business?

The answers to these questions will help you choose the right corporate structure that will ultimately fit your
needs.

Here’s an overview of the main options that you have. Please be very careful with this decision. We are not
attorneys so we suggest you consult with one so that you make the right choice.  


Sole Proprietorship

If you are starting a business more as a hobby, you’ll probably want to avoid paying the fees necessary to
incorporate. Many people start with a hobby and then try to grow it into a money-making venture. Or, you
might have a relatively straight-forward business. You might be a graphic designer or Web site developer,
who wants to just use the Web to generate leads for some extra income through your freelance work.

In this case, you might just want to keep separate business records, set up a business account and keep
your business-related receipts so that you can write them off as expenses at tax time. You will want to pay
self-employment taxes on a regular basis so as to avoid penalties, and make sure to report all business-
related income on your individual tax return.


The Upsides and Downsides of Sole Proprietorships

The quick-and-dirty benefits of sole proprietorships are that they are (1) easy to start, (2) low-cost, and you
(3) avoid double taxation – that is, you do not have a business entity that is taxed separately from you as an
individual.

But the upsides of sole proprietorships come with a potential cost. The main drawback of this structure is
that you are personally liable for legal claims that may arise against your business. For example, if a
customer decides to sue you for some reason, they can go after both your business and personal assets.

As you will see, we suggest that anyone who is serious about starting a money-making venture should invest
in incorporation, especially since it is relatively low-cost and simple nowadays. This small investment is
usually a good idea, especially when compared to the nightmare of being wiped out personally by problems
caused by your business. So bottom line is that we suggest you invest upfront so that you can sleep better
at night. It’s worth it. Click here or check out the Online Business Incorporation Service that we suggest you
use at www.WhatWeSuggest.com.







Partnerships

Many people don’t like to do it alone. They might just have a friend that they want to go into business with –
or they need skills or money that another person can provide. In many cases, 1 + 1 = 3, meaning that, for
example, you and a partner might be able to get much more done as a team than either of you can
accomplish individually.

In this case, a sole proprietorship is not viable since more than one person will be involved in the business.
Instead, you can form a partnership in which you and your partners are both considered business owners.
Each partner will contribute time, money, and/or skills to the business, depending upon whatever
arrangement you make among yourselves. Be careful to clearly delineate who is responsible for what
upfront because you want to avoid fighting later over how to share profits, assets, or losses.  


General versus Limited Partnerships

There are two main types of partnerships – general and limited. In a general partnership, the partnership
can buy and sell property, products and services as a separate legal entity. However, you and your partners
must report income from the partnership on your individual tax returns.

As with sole proprietorships, the individuals in a general partnership are liable for all of the obligations of the
partnership. There is no limitation on liability. Someone who decides to sue your partnership can go after
both your and your partners’ individual assets. Again, we do not suggest you form a partnership because of
this liability issue.

Alternatively, you can form what is known as a limited partnership where the partners only risk what they
agree to in their partnership contract when they first start the business. In many cases, a limited partnership
is a much more viable option than a general partnership. However, in this case, we definitely suggest that
you consult an attorney before signing such a contract.


C Corporations

If you want to avoid the risk of liability, you must form some type of corporation. Most start-ups will either
incorporate themselves as S Corporations or Limited Liability Corporations.  If you want to sell shares of
stock in your business to obtain funding, you might want to consider forming a C Corporation. Most publicly-
traded companies are formed as C Corporations, which means that they are legal entities separate from the
owners, who are called shareholders or stockholders. These stockholders are not personally responsible for
the fees, liabilities and losses of the business.

This might sound like a good choice, however keep in mind that C Corporations are relatively expensive to
start and maintain. To become incorporated, you have to hire an attorney to ensure that you fill out all of the
relevant documents for the state in which you are incorporating, and then you have to hold annual
stockholder meetings, and keep detailed records to avoid any legal or accounting problems.  

And perhaps most importantly, stockholders of a C Corporation must pay taxes on the business profits at the
corporate level and then again when they report their earnings as individuals. This is known as double
taxation.


S Corporations

To avoid the double taxation issue, some choose to form an S Corporation. In this case, the profits of the
business are what is known as “passed-through” to the individuals that own the corporation. Therefore, the
owners only pay taxes once at the individual level. If you expect losses in the short-run, you might want to
incorporate as an S Corporation since you will be able to report a loss on your personal tax returns and thus
minimize the taxes you owe.

However, there are certain limitations of forming an S Corporation that you should be aware of. You must
run your company on a fiscal calendar year, have less than 35 individual stockholders who must all be U.S.
residents, and you can only issue one class of stock. There are other restrictions which you should review
with an attorney before deciding to form an S Corporation.


Limited Liability Corporations – Our Recommendation

Even though we say that you should think about which corporate structure is best for you, most of the time,
we suggest that our clients form Limited Liability Corporations (LLCs). Think of an LLC as a corporate form
that is the best of all possible worlds. It is relatively simple and inexpensive to form and maintain, and it
provides the owner or owners with limited liability.

There are no rules as to who can be a member or manager of an LLC. You can own it by yourself; you can
have family members as co-owners; and you can even have other corporations as the owners of an LLC. It
is very flexible. Like a C Corporation, an LLC is a legal entity separate from the owners so your personal
assets are protected from anyone who might decide to sue the LLC.

Also, an LLC enables you to avoid double taxation. As an owner, you only pay taxes on the profits that are
distributed to you, which you then declare on your individual tax return.  

Even though we always recommend speaking to your attorney and/or accountant first, if you want a do-it-
yourself solution, click here or check out the Online Business Incorporation Service that we are currently
recommending at www.WhatWeSuggest.com.


Taxes and Bookkeeping


No matter which corporate structure you decide to adopt for your online venture, you need to keep your
records straight. First-time entrepreneurs, who most often try to handle their own bookkeeping, should use
an off-the-shelf accounting software packages, which will make your life much easier and will help you get
organized right from the start.

For our recommended accounting solution go to www.WhatWeSuggest.com and check out the Accounting
Software Solution, or just click here.

Go to the next Chapter
The Book:  E-Marketing In-A-Box
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