Choosing the right structure for your ecommerce business

Finaloop Team
December 30, 2022
How do you know which tax structure if right for your business? Read this post to find out.

Founders often put a lot of thought into choosing the right tax structure for their ecommerce or DTC brand when starting a new business. But, many of you don't realize that this isn't a one-time decision.

As your brand grows and your strategic plan changes, you should reassess this decision to determine if your structure still fits your goals. Here is a quick recap of a recent Twitter thread we shared on different tax entity structures and how to determine which is right for you.

The right entity when you started, may not be the right one today. The start of the new year is THE time to reassess and make a needed change.

Which entity is best for you? Let’s find out!


The tax entity types you need to know

There are 4 relevant tax entity types:

- Sole prop or SMLLC

- Partnership (LP or multi-member LLC)

- S corp (INC or LLC, that elects to be an S corp)

- C corp (INC, or LLC that elects to be a C corp)

One can save you thousands on self-employment tax, another can save you millions by exempting 100% of income from an exit. Let’s dive into pros, cons, and when it’s right.

Here's an overview only. Check with your CPA before making a change, since other taxes (e.g., state) may apply.

Comparison of tax entities

First, let's define a few terms:

NI - Net income

SE - Self-employment

Now, on to the entity types.

Sole proprietorship or SMLLC

  • TAX: NI passes to owner’s return. Owner pays SE tax of 15.3% + income tax up to 37%. If eligible: 20% deduction on NI and 50% of SE tax paid.
  • BEST FOR: Earlier stage bootstrapped solopreneurs.
  • PROS: Easy, complete flexibility, no separate tax return, no business tax.
  • CONS: No separation between business and owner’s finances, funding is hard, SE + income tax due on all net profit even if not distributed.


  • TAX: NI passes to partners based on ownership %. Most partners pay SE tax of 15.3% + income tax up to 37% on their share of NI. If eligible: Deduction for 20% on NI and 50% of SE tax paid.
  • BEST FOR: Early stage, bootstrapped brands with more than one founder that are not yet in a profitable position.
  • PROS: Easy, no business tax
  • CONS: Funding is hard, SE + income tax due on all net profit even if not distributed.

S corporation

  • TAX: NI passes to owners based on ownership %. Owners must receive reasonable comp for their services. Payroll tax of 15.3% on salary and owner pays income tax up to 37% on their share of NI + their salary. If eligible, can get 20% deduction on NI.
  • BEST FOR: Brands that are profitable even after paying reasonable comp to owner-employees. This will give you the max benefit from SE savings.
  • PROS: Saves a lot in SE taxes. No income tax for business, only owners.
  • CONS: Complex requirements, no foreigners allowed, income tax is due even if not distributed, must make the election by March 15, 2023 to qualify for the full 2023 tax year.

C corporation

  • TAX: Entity completely separate from owners. Pays federal tax at 21%. Owners generally pay tax at 15%-20% when a dividend is paid out.
  • BEST FOR: Brands looking for outside investors or if you plan to exit in 5+ years.
  • PROS: Great for equity & SAFE financing, lower max tax rate, you may be able to benefit from 100% tax exemption upon exit if you hold stock for at least 5 years, separation between business and personal
  • CONS: 2 levels of tax (can get expensive), more compliance


As your brand grows, the right entity-type for you can change. Stay flexible or you could lose millions in tax bills. Speak to your CPA to find out if an entity change makes sense for you.

About Finaloop

We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.

*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*

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