How to Run an Online Business Without Incorporating

By Elizabeth Rayne

There are several ways to organize a business other than incorporating. Depending on the nature of your online business and how many people are involved, you may choose to pursue a sole proprietorship, a partnership or an LLC. Over time, as your business grows, you may decide to change its organizational form.

There are several ways to organize a business other than incorporating. Depending on the nature of your online business and how many people are involved, you may choose to pursue a sole proprietorship, a partnership or an LLC. Over time, as your business grows, you may decide to change its organizational form.

Reasons to Incoporate

The main reasons why businesses decide to incorporate is to avoid personal liability for the debts of the business. Without incorporation, if a business is sued successfully, the owner's personal assets may be used to pay the judgment. However, incorporation requires filing forms with the state, paying filing fees, and in some cases, paying additional business taxes. Hence, smaller businesses may determine that limited liability is not worth the extra fees and responsibilities.

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Sole Proprietorship

A sole proprietor is someone who owns an unincorporated business. Generally, you do not need to register the business with the state in order to operate a sole proprietorship. As a result, you avoid the time and fees normally associated with business formation. You are responsible for maintaining records of your finances, and paying income tax, self-employment tax, and in some cases, excise tax. As the owner of a sole proprietorship, you are personally liable for the debts of the business.

Partnership

A partnership is similar to a sole proprietorship, except that two or more people share ownership. In most states, a general partnership is automatically formed when two or more individuals enter a business transaction together, and no formal filing with the state is required. In a general partnership, the owners remain liable for the debts of the partnership. In contrast, a limited liability partnership is created upon filing articles of organization with the state, and the partners are not personally liable for the debts of the business. In either partnership, you should draft a partnership agreement to determine how the business will be managed, and how profits will be distributed. The partnership may be responsible for excise tax and employment tax. Owners of a partnership are responsible for income tax, self-employment tax, and estimated taxes.

Limited Liability Company

A limited liability company (LLC) is considered a hybrid between a partnership and a corporation. An LLC may be formed by one or more people, and provides limited liability for the debts of the business. Generally, an LLC is formed by filing articles of incorporation with the state with the appropriate filing fee, which will vary. Unlike a corporation, the LLC is not taxed as a separate legal entity. Instead, it is taxed like partnerships and sole proprietorships, in that the income and the tax obligation "pass through" the LLC to the owners. However, some states may require LLCs to pay an annual business entity tax. Owners of an LLC are responsible for income tax, self-employment tax, and in some cases, excise tax.

Converting Business Structure

As your online business grows, you may decide to change your business structure. For example, as your profits increase, you may have enough income to cover the additional filing fees and take advantage of an LLC's ability to protect your personal assets. To change business structure, you will have to start from the beginning with business registration. To form an LLC, you will file articles of incorporation with the state. You may be required to apply for a new Employer Identification Number (EIN) from the IRS. Further, some states will require you to reapply for licenses and permits after you change your business structure.

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General Partnership Vs. LLC

References

Related articles

How to Convert a Sole Proprietorship to a Partnership in Maryland

In many cases, a business gets off the ground with the work of a single owner operating a sole proprietorship. As the company grows and becomes more profitable, additional owners often come into the picture, which can necessitate a restructuring of the business. In Maryland, new business registrations are handled by the Maryland Department of Assessments and Taxation. However, by law, neither sole proprietorships nor partnerships are required to register. Instead, the conversion process is handled through internal partnership agreements and by amending any existing licenses to include the names of the new owners.

Going From Multi Member LLC to Single Member LLC

You don’t have to keep the same members in your business, even if you start off as a limited liability company. Your LLC’s members can sell their shares of your business to someone else, continuing the business’s status as a multiple-member LLC, or sell their shares to you, creating a single-member LLC. Though your business will continue to operate normally, you will likely need to change your tax elections and accounting methods.

Kentucky Rules on Sole Proprietorship

Sole proprietorships are common business structures because they are relatively simple to set up and provide flexibility in management. As a sole proprietor, you may independently manage your business and retain its profits. However, sole proprietorships do not provide limited liability as other business entity types, such as corporations, provide. Kentucky business registrations are handled by the Business Services section of the Secretary of State's office. The state requires all business types, including sole proprietorships, to also pursue professional licensing and tax registration.

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