Why Online Sellers Should Incorporate

Last Updated at: Oct 30, 2020
 AIOVA, an online sellers’ association representing over 2000 sellers has approached the Competition Commission of India (CCI) with an antitrust complaint against Amazon.  They have charged Amazon of practicing an anti-competitive arrangement and favouring select sellers on its platform. 


The government has the legal rights to register new businesses for public, private, limited liability partnership(LLPs) and one-person companies.But general partnership and sole proprietorships are not incorporated. All businessmen takes risk in the form of loan, penalty or credit from the government. If the businessman operates on these, he cannot enjoy the limited liability and credibility.

We’re always complaining about dealing with the government – whether it is to get a driver’s license or renew a passport. But now that you’re an entrepreneur, you’re going to feel this more strongly as your interactions will be more regular. The government has promised to make things smoother, but that’s not going to happen for a while.

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On account of this, many new entrepreneurs choose to postpone registrations that are optional. So they get a service and VAT registration, but won’t register their business as a private limited company, for example. In this post, we will explain why this is not the right approach and why incorporation is best done sooner, rather than later. But first, let’s understand what is meant by incorporation.

What is Incorporation?
The government has the authority to register new businesses as companies (private limited, one-person and public limited) and limited liability partnerships (LLPs). This is known as incorporation. All such businesses have certain rights and advantages, in exchange for which you need to comply with the regulations of the government. Sole proprietorships and general partnerships cannot be incorporated. Therefore, if you operate as one of these two, you will not enjoy any of what is mentioned below.

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Limited Liability
All entrepreneurs take on risk. This could be in the form of a loan, credit from vendors or the possibility of penalty from a government entity. Let’s say you’re importing food stuffs from a foreign country that is stopped by customs. If it’s illegal, you would face a fine from customs; if you were hoping to sell the product quickly in order to repay the vendor or the loan, you would end up with a debt. If this deal was done by you personally, the customs department, vendor or bank could sell your personal possessions to recover the money. This is because you have unlimited liability as an individual. The liability of a company and LLP is, however, limited. Therefore, the bank and vendor would only be able to recover their money from the business and not you. So even if there’s no money in the business, your personal possessions are safe.

In the above example, we assumed that you had taken a loan as a sole proprietor. In reality, this is very unlikely as banks generally don’t think that they are creditworthy, at least at first. The matter is different for incorporated entities as their creditworthiness is more easily proven (through audited account statements and return filings). Other basic services, such as a payment gateway, are also unavailable to unregistered businesses. While you do have some options today, such as Instamojo, they are more expensive. So while registered companies do have to invest time and effort into submitting data to the authorities, even small businesses would find that these burdens are outweighed by the benefits.

Access to Capital
E-commerce websites rarely make money at first; it takes time, which is why you often need someone else’s money. But venture capitalists don’t give money to ideas. Instead, they fund businesses on which they can get a seat on the board and equity in exchange for the money they put in. This is something that unregistered businesses can never do because there is no such thing as a board and no equity to give the investor. To do so, you need to incorporate only as a private limited company. This is because OPCs can only have one shareholder and LLPs can only accommodate partners, not shareholders, which would then require the investor to participate in management.

Attracting Talent
Your new business needs bright employees if it’s going to grow at the pace you want it to grow at. And this doesn’t generally happen with employees, especially when you have no profits to speak of. You actually need people who feel like they own a part of the business. The only way to do this is by actually giving them a part of the business, based on their contribution. You can do this via a private limited company, which will enable you to make provisions for employee stock options or ESOPs. ESOPs have two big advantages: the first is that you can hire great talent at a lower price, because you are compensating them in equity, and the second is that the equity will only vest over a period of time, so you are assured a low attrition rate.

For an online business, it’s unlikely to face personal liability or claims. So it is better to protect your home, personal assets and personal bank account. It is better to have corporation, as it is more reliable and professional and also has unlimited life.You can avoid estimated tax penalties in the year. It is easier to obtain bank loans and attracts investors. Make sure of the factors involved at state-level and then decide to incorporate .