So you’re running an e-commerce business (or thinking about it!).
There comes a time when every business owner faces the question of incorporation. Does incorporation make sense for me? Is this the right time?
While different jurisdictions have different laws and procedures, this guide will help you the value of a limited liability company compared to a sole proprietorship – and give you a starting place to consider which one is better for you.
So whether you’ve just started your e-commerce business, or have been operating as a sole proprietorship for a while, here are four signs it could be time to incorporate:
1. You want to bring in more talent
Sole proprietorships are typically the business structure of choice for people who are running one-person operations, or are conducting their e-commerce business as a side hustle.
If you’re growing your team and want to bring on more talent, it could be a sign you’re ready to incorporate your business.
Not only is having an incorporated business the standard, but it makes things far easier when it comes to things like payroll, legal contracts, and credibility. As a limited liability company, salaries and other company benefits like medical insurance are typically tax deductible as well.
2. You want to move beyond a home office
Very generally speaking, when you’re operating your business from a home office, the risk of encountering liability issues is not high.
However, if you’re transitioning to an office space (or even a physical store), it’s standard practice to have an incorporated business, and have your personal assets protected in case of any unexpected events.
For example, if someone slips and falls in your office and decides to bring this to court, if you’re a sole proprietor, they are directly suing you. However, if you’ve incorporated into a limited liability company, it would be your business that is accountable (which means your own house and car, for example, cannot going to be used to settle the debt).
Making the move beyond a home office is a sign of growth. When you’re interacting with more people and more parties on a regular basis, it is a good idea to consider incorporating and protecting yourself against the unforeseen circumstances that may pop up.
3. Sales and profits are growing steadily
As a sole proprietor, your business’s profits are your profits, and are considered one and the same as your personal income. This means that when tax season rolls around, your business profits are taxed under the personal income tax system.
If your business is really taking off and profits are growing consistently, after a certain point it makes more sense to be taxed at a corporate rate. This typically equates to a lower rate, benefiting you in the long term.
That being said, different places have different taxation systems so make sure to consult the rates for your specific jurisdiction.
4. You’re aiming to get additional funding
When it comes to financing, most investors and banks will prefer – and sometimes require – you to have an incorporated business.
For investors, a limited liability company means that in exchange for capital, they can own shares of your company. This means that if you’re looking to get more funding in order to scale, you have the option of issuing equity instead of taking out a loan.
What’s more, choosing to incorporate your business demonstrates a certain level of seriousness or dedication to your business – in other words, investors know this is more than just a hobby you do in your spare time.
If you want to scale, it’s time to incorporate your e-commerce business
When you’re looking for signs you should incorporate, look for signs of growth. At the end of the day, if you’re aiming to grow and scale your business beyond a one or two-person operation, that’s already a sign you should incorporate. In fact, if that is your end goal, it’s often better to incorporate sooner than later.
For further reading, here are some handy guides you can check out:
- Company incorporation in Hong Kong
- Forming a company in the United States
- Company incorporation in Canada
Neat is a modern alternative to traditional banks, providing entrepreneurs with services like business current accounts, corporate Mastercards, and automated expense tracking – without the hassle. If you’re evaluating different jurisdictions to incorporate your business and are looking into Hong Kong, check out this blog post on what makes it a great city to do business.
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