STARTING E-COMMERCE STORE?…FIRST SOLVE THE OWNERSHIP DILEMMA!

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Venturing into the realm of e-commerce is a highly lucrative, challenging and exciting business option as of today, and deciding on the appropriate ownership structure for your e-commerce platform is possibly the first question that will come to your mind as a budding entrepreneur. The key determinants that need to be taken into consideration for deciding upon your ownership pattern include your income vis-à-vis the investment requirement of your business, risks and liabilities, tax considerations as well as formalities and expenses. Although there are several business ownership structures to select from and adopt, the following four are the most common ones opted for e-commerce business:

SOLE PROPRIETORSHIP:

There is no legal distinction between the owner and the business.It can be operated under the owner’s name or any other fictitious name.All contracts are signed with the owner’s name.

ADVANTAGES

  1. Simple and easy to start-up
  2. Subject to fewer regulations
  3. Owner has complete autonomy over entire business.
  4. Nominal cost of set-up

DISADVANTAGES

  1. Owner has unlimited liability
  2. Provides no shield of owner’s personal assets from business debts, losses and other liabilities

BUSINESS PARTNERSHIP:

Similar to sole proprietorship but has more than one owner or business partner involved.Usually, a partnership agreement defines each partner’s responsibilities.

ADVANTAGES

  1. Your tax burden gets reduced as the net tax payable gets distributed amongst all partners.
  2. Relatively simple and easy to start.
  3. Enables sharing of resources and expertise
  4. Relatively nominal cost of set-up

DISADVANTAGES

  1. Each partner is personally liable for business debts and liabilities.
  2. Autonomy over the business gets divided.
  3. The likelihood of differences and disputes is higher.

PRIVATE LIMITED COMPANY:

This is an independent legal business structure in compliance with the Indian Companies Act of 1956.

Requires a minimum of two members or directors.

ADVANTAGES

  1. Personal Assets are not at risk in case of failure of business.
  2. The Company is a legal entity, separate from its directors or members.
  3. Perpetual existence of the company by means of succession
  4. Better avenues for borrowing funds

DISADVANTAGES

  1. Shares cannot be freely transferred. Shareholders cannot offer their stock freely to general public.
  2. High initial investment.
  3. Ownership restrictions
  4. Number of shareholders cannot exceed 50.

CORPORATION:

Typically owned and controlled by its “members”, who are separate entities from the business.

A board of directors with executive as well as non executive members supervises the management of the company

Ownership is transferable here.

ADVANTAGES

  1. A shareholder’s liability for company debt does not extend beyond his investment in the business.
  2. The company can raise capital by issuing stocks and bonds.
  3. Expertise of business becomes much higher owing to involvement of several members.

DISADVANTAGES

  1. Expensive to form or start up.
  2. Tax needs to be paid on the company’s profits as well as on the dividends received.
  3. Subject to several complex regulations.
  4. Considerable record-keeping is required.
  5. Chances of possible conflicts are high

 To decide on which ownership pattern to choose for your e-commerce venture, you need to ask yourself the following questions:

  1. What is going to be the risk level of your e-commerce venture?
  2. How much capital can you put in as initial investment?
  3. Are you ready to comply with the regulations of establishing and running a limited liability partnership or a corporation?
  4. Do you have the necessary expertise of running an e-commerce business alone?
  5. Do you have the necessary resources to start and run the e-commerce platform?
  6. Are you ready to partially relinquish control, be it in terms of decision making or control over profits.

As we can see, all the above have their own set of pros and cons, and most importantly, a business structure is not rigid, it can easily evolve or change with time. Generally, small scale entrepreneurs prefer to start with sole proprietorships or partnerships and gradually move on to form corporations or private limited companies. So it is completely up to ponder over the above questions and decide what is best suited for you. All that can be said here is, “to each, his own!”

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