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When running an online business, it can be more complicated to decide what business structure is right for you. In an online environment, you can scale up your business at a faster rate. However, you may also have different considerations in terms of debt and liability. Nevertheless, the basic considerations about what business structure will work for your business are similar, even though your operations may all be online. This article will set out three tips for choosing a business structure for an online business, including:

  • the possibility of pivoting; 
  • thinking about liability or debt; and 
  • the benefits of a company structure for eventually selling the business.

Transitioning Your Online Business to a Different Structure

With an online business, you may be expanding in a range of different directions. You might even have several ideas about what might work best for your business over the medium and long term. When thinking about your business structure, one tip is to know that you can change your structure if you want to pivot your business later. This is particularly useful when starting as a sole trader and later looking to form a company

There are a few different ways of thinking about pivoting your business. As the circumstances for your online business change, many founders will look to align their structure with the new direction of their business. A typical example is when you see significant value being created by your business. This can either take the form of physical assets or money, or the development of significant goodwill or intellectual property. When these tangible and intangible assets become more valuable, you may want to consider how to protect them through your business structure. A company structure can often be the best way of doing this. 

Talking to a commercial lawyer about whether your existing structure is right for your business is a useful way of getting a sense of how your online business is placed.

Consider How Much Liability Your Online Business Will Need

Different business structures can significantly impact the level of liability or debt your online business can access and maintain. This can play out in several different ways. For one example, when you are operating your online business as a sole trader, you are personally liable for the debts of your business. So if your online business requires high start-up costs and you are seeking finance for this, having a sole trader structure may put your personal assets at risk if the business fails. However, a limited liability company structure will protect your personal assets. This structure will separate assets and liabilities that the business holds since a company is its own legal personality. 

Liability and debt are also relevant when considering which business structure will allow your online business to access external finance most easily. Banks and investors tend to prefer to deal with companies rather than sole traders or partnerships. However, there are exceptions to this. In general, if you need significant finance from external sources, forming a company is usually the best way to prepare for that process.

Benefits of a Company Structure for Growing and Eventually Selling

Finally, a company structure is a popular choice for online businesses because it dramatically simplifies the process for selling. It is popular in New Zealand for founders of online businesses to sell their operations, typically to larger businesses overseas. However, this can be a complex operation if you structure your business as a partnership or sole trader. In this case, it would involve changing the fundamental structure or ending the partnership. As a company, this process is more straightforward. It can sometimes only involve changing the shareholders – not the fundamental business structure. 

Key Takeaways

If you have an online business, it is essential to choose a business structure that best aligns with your strategy in the medium and long term. For instance, if you are looking for significant finance in the early stages of the business, a company structure is usually more suited to taking on loans and outside investment. A company is also the preferred vehicle for selling an online business. However, it is essential to note that you can change your business structure later on, particularly if the direction of your online business is changing. 

For more information on choosing a business structure, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

Can you change the structure of your online business later on?

Yes, you can change your business structure if you would like to later on. You are not fixed to a structure for a particular period of time.

What is the relevance of your debt when considering what business structure to use?

Different business structures can expose you to personal liability for your business’ debts. For example, as a sole trader or partnership, you will be held personally responsible for your business’ debts. This structure can place your personal assets at risk, like your home or car.

What is the best business structure for selling an online business?

Historically, a company structure has been the most popular form for online businesses being bought and sold.

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