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Business Structure & Legal
You are all ready and setup with
a detailed plan and now it’s time to decide on a legal structure
for your drop shipping business. In this section we will also
discuss setting up a checking/savings account, PayPal account,
accounting systems, and filing/record keeping systems. These are
all very important decisions and steps that can save you lots of
time in money in the future.
Firstly, let’s examine a
variety of different business entities and give the benefits and
downfalls to each. The decision on how you establish your
business is extremely important. There are five main types of
legal structures for your business.
Sole Proprietorships are
unincorporated businesses. They are also called independent
contractors, consultants, or freelancers. This type of business
has pass through taxation, meaning you report profits or losses
on your personal tax return. This is the easiest form of
business to set up, and the easiest to dissolve. The problem
with this structure is that if you were to ever get sued or your
business was to fail you would be personally liable for any
debts. This means you could potentially lose your personal
assets such as your house or car. DO NOT CHOOSE THIS STRUCTURE
WHEN STARTING ANY TYPE OF BUSINESS.
C-Corporations are
incorporated businesses. Every form of business besides the sole
proprietor and partnership is considered a separate entity, and
this often provides a measure of legal and financial protection
for the shareholders. The shareholders of corporations have
limited liability protection, and corporations have full
discretion over the amount of profits they can distribute or
retain. Corporations are presumed to be for-profit entities, and
as such they can have an unlimited number of years with losses.
Corporations must have at least one shareholder. The problem
with this structure is that you will be double taxed. You will
be taxed on the corporation’s profit and each shareholder will
also be taxed. You may consider a c corporation as a legal
structure if it fits your needs and you will have a multitude of
investors. For a small online startup we do not recommend this
structure.
Partnerships Like
corporations, partnerships are separate entities from the
shareholders. Unlike corporations, partnerships must have at
least one General Partner who assumes unlimited liability for
the business. Partnerships must have at least two shareholders.
Partnerships distribute all profits and losses to their
shareholders without regard for any profits retained by the
business for cash flow purposes. DO NOT CHOOSE THIS STRUCTURE
FOR YOUR ONLINE COMPANY.
S-Corporations have features
similar to a partnership. An S-corporation must have at least
one shareholder, and cannot have more than 100 shareholders. If
any shareholder provides services to the business, the S-Corp
must pay that shareholder a reasonable salary. This salary is a
separate payment from distributions of profits or losses. An
S-Corp avoids the double taxation that a C-Corp endures. You may
wish to consider this type of entity for the structure of your
business. Please check with state laws.
Limited Liability Company
(LLC) is type of company, authorized only in certain states,
whose owners and managers receive the limited liability and
(usually) tax benefits of an S Corporation without having to
conform to the S corporation restrictions. An LLC can have one
or many members. We highly recommend that you establish this
type of entity to limit your liability and also simplify your
taxes. Visit Legal Zoom to
setup your company in minutes.
REGISTERING YOUR
BUSINESS
Now that you have decided on a legal
structure for your business we recommend you go to
Legal Zoom and register your
business. The process only takes minutes to complete. You will
receive a tax ID number (EIN) and you will need your Tax ID for
many of the processes and steps throughout the establishment of
your company. We highly suggest you to choose the LLC structure.
You will be provided with a few documents and also receive an
EIN number. The EIN (Employer Identification Number) is like a
social security number to uniquely identify your business. Make
sure to keep this number handy as you will be using it
constantly throughout the process of setting up your online
business.
SETTING UP BANKING ACCOUNTS
Congratulations on officially setting up your company. You
now have a legal, registered business! Now it’s time for you to
choose a bank for your business checking and savings accounts.
We suggest you choose a local bank, preferably where you do your
personal checking/savings. Before heading off to the bank to
create your business checking and savings accounts make sure you
bring supporting documents such as social security card,
driver’s license and business registration forms. Most banks
allow you to establish a business account for as little as $100.
Shop around and find a bank that offers free business checking,
the fees are high on some business checking accounts so pay
attention.
SETTING UP A PAYPAL ACCOUNT
The next step is to establish a
PayPal account. You want to do this as it offers your
customers an alternative to standard credit card payments.
Customers like options and PayPal offers a convenient way for
you to instantly receive payments. In addition, if you decide to
offer some of your products for sale on eBay you will already
have the PayPal account setup and
ready to go. Make sure to setup a business account so your
business name appears on the customer receipt and not your
personal name. We will examine merchant account options in
section 14.
PLANNING FOR TAXES AND ACCOUNTING
It is time to start planning for accounting and taxes. Your
business will be taking in revenue and having expenses. It is
extremely important to keep proper records. One of the simplest
ways to achieve this is through a program like
QuickBooks.
QuickBooks is an accounting program that will take you very
little time to learn. It is also extremely beneficial because
you can see exactly where the money is going and keep a close
eye on your bottom line. QuickBooks also has a nice feature that
ties directly to your checking account. It allows you to
download transactions without having to login to your online
checking account.
Another option for accounting is hiring
a professional accounting firm. Almost every firm will provide
you with a free consultation and show you pricing right up
front. Having an accounting professional to turn to can be very
beneficial when making important financial decisions that affect
your business. Whether you hire a professional to assist you
with accounting is a personal decision you should examine. You
will still need to implement QuickBooks in to your business so
you can see real-time figures on demand. Click the following
link to visit the QuickBooks website.
Taxes on you and
your business is an important matter. This is where making sure
you keep proper records comes in to play. Depending on the type
of business you established will determine your tax liabilities.
If you established an LLC you will file taxes annually. Please
check with a tax accountant or CPA regarding the tax liabilities
in regards to your unique situation.
FILING
SYSTEMS AND RECORD KEEPING
With any type of
business it is important to keep proper records at all times.
One of the easiest ways to achieve this is through an effective
filing system. Remember your filing system refers to both
physical papers and electronic documents so be sure to systemize
your folders and files on your computer in an organized manner.
Setting up an effective filing system will keep you organized,
save time, and help you provide top-notch customer service.
Setting up your filing system in the beginning phase of your
business is a great idea because if will build effective habits
so you can stay organized at all times.
Many times you
will have to deal with invoices, send forms, proposals, etc.
Many times sitting down and creating all of these documents can
be very time consuming and you may simply not know how to word
them properly. An effective tool that has about every business
and legal form you could imagine is
Business-In-A-Box. This
effective tool will save you tremendous amounts of time when you
begin running your business. Visit
Business-In-A-Box to
download a free trial.
Again congrats on setting up your
business! Your journey is just now beginning and soon you will
be generating profits through your website. In the next section
we will teach you how to find wholesalers and suppliers to
dropship orders to your customers.
In review, here a few
helpful links on setting up your legal, accounting and
organization structures:
Establish an LLC: Legal Zoom
Setup PayPal: PayPal Account
Accounting Software:
QuickBooks
Business &
Legal Forms: Business-In-A-Box
Step 10 - Picking a Domain Name
The True Web Money Dropshipping eCourse Outline
Start Here - Introduction
The Power of the E-Commerce
What is Drop Shipping?
Why You Should Drop Ship
Getting Started
Setting up a Temporary
Contact
Picking a Niche Market
Getting Started with a Plan
Business Structure and Legal
Picking a Domain Name
Product Sourcing and Finding
Suppliers
Building Your Website
Branding Your Business
Finding a Merchant Service
Provider
Marketing Your Business
Putting it all Together
Sales Strategy
Defining Business Systems
Conclusion
Step by Step Checklist
Website Resources
