What Are the Benefits of Incorporating an Online Business?

Are you thinking of selling your products and services online? Incorporating your online business (or ‘e-business’) into a private company could be a good option for you. However, whether you will benefit from incorporating your online business will depend on several factors.

This article will explore the advantages and disadvantages of incorporating your online business.

Limited Liability

The legal concept of incorporation refers to the fact that a company is separate from its business owner. Like any person, a company can: 

• own assets in its name; 
• enter into contracts with others; and 
• assume liability for its obligations to others. 

One of the main effects of legal personhood is that the law will treat the liabilities of a company as separate from its owners, including any contractual obligations and debts. 

In addition to sole traders, unincorporated business structures can also include general partnerships. Further, your assets can cover any claim against your online business if you are trading through an unincorporated business structure. 

Exploring Limited Liability 

To understand the practical effect of limited liability, you may find it helpful to consider two hypothetical scenarios. 

So, consider you want to sell homemade hot sauces you make in your kitchen on an online platform. You come up with a business name, “Amazing Hot Sauces”. You comply with all the relevant requirements for selling food products, but someone gets sick and needs hospitalisation because you did not properly store your hot sauces. 

Operating an Unincorporated Online Business 

You may trade through the name Amazing Hot Sauce. Still, the law will ultimately hold you responsible if your customer serves your business with a negligence claim. For instance, they may argue you should use more care when bottling your hot sauce to avoid making your customers sick. 

If a court finds your business liable for your customer’s loss, it will order you to compensate the victim accordingly. However, you may have enough money sitting in your business’ war chest, which you use to settle the claim. 

However, if the claim’s cost exceeds the money you have in your business, you will have to settle the difference with your personal assets. To be clear, this might include your savings! You may also need to sell property like your house or car to make good on the claim. 

Operating through a Private Company 

If you follow the proper procedures for selling foodstuffs in England and Wales, your customer could only claim against your business’ assets. This is because the law sees your business as separate from you, its owner. If your customer’s claim results in damages of £100,000 and your business only has £50,000, you would not usually be held liable for the remaining amount. 

That said, this could result in proceedings which could make your company insolvent. Therefore, incorporation can help you minimise your personal risk should something happen in the course of doing business. 

Potential Business Growth

Another benefit to having a private limited company for your online business is that your business will have “share capital”. 

Share capital refers to the fact that ownership in your business occurs through “shares”. When you first incorporate your business, you may be the sole owner. However, you can trade some of your existing shares for others in exchange for payment. Alternatively, you could create new shares to give to others in exchange for investing money directly in your business. 

You will often hear of people referring to the number of shares in a company as “equity”. Equity financing is when your company issues new shares in exchange for money. Moreover, it is the same principle as when a big company become ‘public’ and sells shares to the public. 

Buying and selling shares in a company is advantageous if you want to grow your online business in the future because investors are familiar with the concept of share capital. 

Disadvantages of Incorporating Your Online Business

Other businesses prefer to do business with other incorporated businesses like limited companies because the law holds companies to a higher standard. 

The directors of a company must ensure they comply with all the relevant rules, such as:

• filing annual accounts with Companies House; 
• ensuring they abide by their duties as company directors; 
• ensure they do not mislead creditors; and 
• adhering to the rules laid down in the company’s constitution. 

You will often be the sole shareholder and director for most new online businesses such as yours. As a result, if you do not comply with all the different obligations, you may face civil or criminal penalties

Key Takeaways 

Incorporating your online business is not notably different from incorporating any other business. Trading through an incorporated business requires its directors to follow many more rules than an unincorporated business. However, as the business owner, you can minimise risk through incorporation. Unincorporated businesses frequently benefit from limited liability, meaning the court can order you to sell your personal assets to meet a claim against your business. This protection does not exist if you run your online business as a sole trader. 

If you need further guidance, our experienced corporate lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today at 0808 196 8584 or visit our membership page.

Frequently Asked Questions