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    Business Organizations

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11December

Best Business Structure For Online Business - Shopify, Dropship, Ebay

Business Structure for your Online Company

Are you looking to find the best business structure for your business? Each type of entity has a different form that comes with different regulations and is best suited only for certain businesses. The question then is: what structure is best for me?

There are many different types of business structures to choose from that each will have its own unique blend of liability, tax reduction, privacy, that will reflect the country it is in and the local corporate laws that govern the structure.

Table of Contents:

What Business Structure Should I use for an Online Business?

Why Online Retail Stores (eBay, Shopify, Etsy) are Perfect Offshore

We generally advocate for offshore company formation structures because they give you more advantages especially for online ecom stores and businesses, or any type of nonlocal company that exists virtually.

Local domestic companies really do not make sense if your business is done completely online. Going offshore allows you to take advantage of local laws in other parts of the world that give non-resident business entities room to exist in an environment that are more favorable to enterprise.

While there are is much information online about how to start an online business, there is not, however, much in terms of how to start an online business offshore.

With the recent pandemic, more people are going online than ever before. With travel restricted there has been a huge wave of people looking to conquer online frontiers using foreign companies to their advantage.

There are 3 main advantages to overseas offshore incorporation:

  • taxes
  • protection
  • confidentiality

Most people looking for overseas corporate structures for their business do so because they want to pay less taxes. For most countries, besides the United States, you likely will be able to reduce your tax burden incorporating in a foreign country.

However, if you are an American, you likely will not. The United States has FATCA, which makes it difficult for Americans to form a corporate structure for tax gains. Though they can still legally protect and secure their assets they will not be able to benefit in significant tax reduction unless they move overseas or renounce their citizenship. 

For most other countries, depending on whether there are CFC laws and/or your country has signed onto the CRS, you likely will still be able to mitigate your taxes. We will go into this more at the end of the article.

For more information on using an offshore company for setting up an offshore Ecommerce store go here.

The Unique Advantages of Foreign Non-Resident Company Structures and Entities

Foreign companies or non-resident companies are simple legal structures that exist outside the borders of a nation-state. This allows governments to give them a special status as non-resident entities.

As a non-resident entity, it has the right to exist, just like an individual. And as an individual that exists in a different country it not obligated to pay taxes, just like you are not obligated to pay taxes until you become a resident of the country you live in.

Similarly, legal entities exist much like a person and can exist as a non-resident without incurring tax obligations that generally come with incorporating a business locally.

For more information on how to incorporate online and the different forms of online businesses that work well go here.

The Four Main Types of Business Organization

  1. Sole Proprietorship
  2. Partnership
  3. Corporation
  4. Limited Liability Company (LLC)

#1. Business Structure: Sole Proprietorship

This single-person business structure is the most popular because it does not require any paperwork or real start-up costs and is a one person setup who is both the director and the shareholder. This type of arrangement is often used for single-person businesses that works for themselves, that engage in providing services to clientele without having to be specifically located in a physical place.

While this type of arrangement is great for any startup it is not likely going to be sufficient for when the business starts picking up and growing, with more money coming in, invoices and taxes to be paid, hiring others to do work, will likely create inefficiencies. However its great for someone just starting out.

 
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Who is this Business Structure for

  • Single-member businesses owners
  • Have little or no start-up capital to get the businesses going
  • Single household tax claims

Liability

Because your business runs under your name all debts are incurred to you as a person as the business has no separate legal entity. This makes the lability very high. If you are sued or if any creditor goes after you you will personally be liable.

Advantages of a Sole Proprietorship

  • The owner receives 100% of the profits which are only taxed once.
  • It is the simplest and most affordable form of business organization with few setup requirements.
  • The owner has complete control and flexibility over the running of the business.

Disadvantages of a Sole Proprietorship

  • The most significant disadvantage is that the owner of a sole proprietorship is subjected to unlimited liability. As there is no legal separation between the owner and the business, the owner is entirely and solely liable for all business debts, lawsuits, and other dangers. 
  • The owner is the only one who can contribute capital to the business. This limits its ability to raise substantial funds.
  • It is difficult to transfer ownership because there is no separate legal status between the owner and the business.
  • All profits are taxed as personal income, which often results in less favourable tax rates.

#2. Business Structure: Partnership

Partnerships are similar to sole proprietorships except for the fact that they involve two or more legal entities (which can be either corporate or natural persons) sharing ownership of a business. As with sole proprietorships, there is no legal separation between the business and its partners. 

When forming a partnership, the partnership agreement should clearly lay out the responsibilities of each partner, the amount of authority they have, and the share of profits and liabilities that each partner is due. 

There are two main types of partnerships: General Partnerships and Limited Partnerships. In a general partnership, all partners are entirely liable for the business’ debts and losses, and so there is little protection from liability. On the other hand, a limited partnership allows for limited partners who act only as investors.

They have no managerial power, and their liability is limited to the amount that they invest in the partnership. However, even limited partnerships have to have at least one general partner.

Who is this Business Structure for

  • Raising capital amongst friends and family
  • Want passive investment partners

Liability

General Partnership members have a high level of liability whereas Limited Partnerships risk only the assets that the partners invest

Advantages of a Partnership:

  • Similar to sole proprietorships in the level of flexibility, simplicity, and affordability.
  • Partners can pool their resources and expertise.
  • The existence of limited partnerships allows some partners to obtain limited liability protection. Limited partnerships have become particularly popular vehicles in the UK.
  • Partnership profits are taxed only once as income tax in the hands of the partners.

Disadvantages of a Partnership:

  • In general, partnerships do not offer limited liability protection to their partners. Even in the case of limited partnerships, it is still necessary to have one or more general partners.
  • Require a great deal of trust because partners are jointly affected by each other’s actions.
  • Can be complicated to create a sound partnership agreement, and there can be severe consequences if such an agreement is not properly established.
  • The partnership can be terminated by either partner at any time. 
  • Profits are shared between partners and therefore diluted.

#3. Business Structure: Corporation

A corporation is the most common structure and term that we here and is often used for businesses or individuals who would like to incorporate a separate legal entity that is a separate and distinct entity. This ensures that any debts incurred or liabilities are taken on by the company itself and not the individual. This is most beneficial for an entrepreneur, digital nomad or freelancer who is looking to sell their services online. 

While a domestic corporation that is incorporated in traditional business centers have high startup costs that will likely include auditing, financial reporting, annual meetings, etc.., an offshore business, often called an offshore corporation, offshore company, or International Business Company (IBC) structure exists in a regulatory environment that is much more business-friendly that often comes with little or no reporting and auditing requirements, with simple incorporation processes that are more able to be changed or amended.

Who is the business structure for

  • Digital-based service business
  • Software as a service SAS business
  • Consultancy
  • Digital Marketing Agency
  • Ecommerce

Liability

All liabilities that come with the incorporation of the entity are born by the structure. That means all debts and loans are separate and distinct from personal assets.

Advantages of a Corporation:

  • The main advantage of a corporation is that it offers limited liability protection to its owners. Shareholders are only liable for the corporation’s debts and obligations to the extent of their capital investment in the corporation. This is the case for both C-corps and S-corps.
  • Can offer significant tax advantages, as many jurisdictions have favourable corporate tax rates and treatment.
  • Separates profits/losses and assets/liabilities from the owners. This results in greater levels of asset protection as well as increased privacy and confidentiality.
  • The corporation exists independently of its owners resulting in easy transfer of ownership and greater long-term sustainability.

Disadvantages of a Corporation:

  • Corporations are generally the most expensive to establish and maintain.
  • Corporations are complex entities which require a great deal of administration and paperwork.
  • There may be arduous legal requirements such as compulsory annual meetings, registered offices, the need to have a legal secretary etc.

Benefits Offshore Corporation vs Onshore Corporations

  • Tax Advantages (if structured properly)
  • Free yourself of double taxation through treaties
  • Simple incorporation
  • Fewer regulations
  • Freedom to change and amend and move
  • Enhanced privacy 
  • Greater liability and security
  • Minimal reporting and auditing

#4. Business Structure: Limited Liability Company (LLC)

A Limited liability Company (LLC) offers some unique advantages that can not be found as a sole preordered nor as a corporation. A limited liability company allows for more than one individual to exist in a company structure by means of share capital without having liability by any of the members. The structure exists as a pass-through entity whereby the individuals who are part of the entity are taxed individually rather than the structure itself.

In other words, the dividend pass through the structure to the members directly with the structure not incurring any taxation directly. An LLC is a mixture of a corporation and a partnership that gives owners control of the business while at the same time a degree of liability.

Limited Liability Companies are enjoyed because there is much less hassle to set up than traditional corporations and are generally speaking more flexible to form and maintain.

Who is the business structure for

  • A project that requires a number of individuals
  • Investment-related projects
  • A business that requires legal separation

Liability

Limited Liability for all members involved

Advantages of a Limited Liability Company:

  • One of the most popular and well-known business structures. It offers small businesses access to the advantages which are common to corporations.
  • As the name suggests, a Limited Liability Company offers limited liability protection to its owners.
  • LLCs are excellent offshore financial vehicles. There are many offshore financial centres which offer these types of business entities, which can provide many benefits to their owners such as reduced taxes, asset protection, and unparalleled financial privacy.
  • LLCs are usually taxed as partnerships or proprietorships would be and so they avoid double taxation.
  • LLCs have flexible ownership requirements which allow as many or few owners as desired. 
  • It is a separate legal entity which can exist independently of its owners, making transfer of ownership easy.

Disadvantages of a Limited Liability Company:

  • Although LLCs are usually cheaper to form than corporations, there are still incorporation costs involved. It is normally more costly than forming a partnership or sole proprietorship.
  • There are annual administrative costs and requirements.
  • Members are personally liable for taxes.
  • There can be arduous accounting and reporting requirements depending on the jurisdiction.

Benefits Offshore LLC vs Onshore LLC

  • Lower taxes
  • Simple incorporation
  • Business cost reduction
  • Less regulation
  • Enhanced privacy 
  • Asset protection
  • Minimal reporting and auditing

Choosing the Right Form of Business Organization

Each form of business organization differs greatly in terms of the following features:

  • Taxation treatment
  • Formation costs and requirements
  • Maintenance costs
  • Liability protection
  • Level of flexibility and convenience 

The right type of business structure for you will depend greatly on your own personal situation and requirements. It is also important to note that the specific characteristics of each of these types of organizations can vary widely across different jurisdictions.

Where Should You Start your Online Business? 

There are many countries around the world that allow you to set up a business as a single person entity. Forming an offshore business structure can be done in dozens of countries around the world. 

Go here to see our list of countries where we incorporate in.

Our top pics are

  • Nevis
  • Marshall Islands
  • Panama

But there are many variations that include in Europe and the United States. Yes that's right. The USA is actually the biggest offshore tax haven in the world! With Delaware and Wyoming leading the way.

See here for some of the best places to form an online business where we also talk about how to create a tax-free offshore corporate structure for online businesses.

Taxation Of Your Online Business Company (eBay, Shopify, Etsy)

The best part about forming an offshore company for an online business is that you can make it tax-free. (in certain specific cases) However, if you are a US resident you still have a tax liability even if your business is incorporated in an overseas country.

The United States taxes worldwide income as opposed to a territorial based taxation system that most of the world practices and you are obliged to report all income that is made worldwide no matter where it exists or where it was made.

If you are a US resident then your tax liability is determined by worldwide income. If you are a US passport holder but reside in a country outside of the U.S. then you are able to have a Foreign Earned Income Exclusion Agreement FEIE that allows upwards of 110,000USD to remain tax-free.

For US passport holders starting an offshore foreign company may still make sense for other reasons, however, you likely will not as much tax savings because of US CFC laws and its taxation system that ties individuals to all corporate structures held overseas.

If you are a resident of a country that has a territorial taxation system, which is most of the world, then you positioned in a better place to take maximum advantage of a foreign company formation as you are only taxed on income that is brought within the country. 

This means that you do not have to pay any taxes on income that is generated outside of the country. The taxes that you do have to pay are on any income or dividend that are brought into the country through the profits that you have accumulated from your online company.

In other words, if I live in the UK for example, and primarily deal with customers overseas, have an IP address that is not located in the UK, then I am only obligated to tax income that is brought within the country. This is usually done by being hired as a contractor by the foreign company whereby monthly payments are sent as earnings onshore to your account within the UK.

Non-Resident Companies Tax Benefits for Non-US Individuals 

The last category of taxation falls for individuals who live outside of the country where they have a passport. For instance, if you are a citizen of the UK but live in Thailand for instance you are not obligated to pay taxes to the UK government because you are deemed a non-resident according to UK tax law (however you must fulfill the obligations that satisfy those conditions). Your tax obligations therefore would be tied with the Thai tax authorities.

What this means is, if you live in a country that has no local taxation ie. a tax haven or a country that has no income tax then not only can your online business profits exist outside of the country tax-free, but you can bring profits into the country without ever being taxed!

It should be noted that tax issues are complex and should be properly sorted by a qualified legal representative before your start. The advice contained within is for explanation only and does not constitute advice that should be acted upon without proper consultation.

Takeaway

Online businesses will only continue to grow as people move online. Having an offshore business structure makes sense for a lot of reasons, does it make sense to you?

 

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