The world of business structures can be intimidating. Whether you’re just starting or looking to optimize your existing setup, understanding the various business structures is crucial for long-term success and financial well-being of your domain investing business.
In this comprehensive guide, we will identify and discuss different business structures available to domain investors. The best business structure for domain investors depends on their business goals as well. By understanding the pros and cons of each structure, we will help you make an informed decision that aligns perfectly with your goals and aspirations.
We’ll go through the implications of each business structure, highlighting key factors such as ownership, formation, taxation, liability protection, management, funding, and maintenance.
Whether you’re an individual domain investor or part of a team, this guide will equip you with the knowledge and insights needed to make a well-informed choice that suits your specific circumstances.
5 Business Structures for Domain Investors
Sole Proprietorship
This is the simplest type of business structure for sole owners of a business. The cost of setting up a sole proprietorship is minimal compared to other structures. However, this business formation does not separate the domain investor from the business itself. As the sole business owner, you have full control of the business, and get all the profit. On the contrary, sole proprietorship does not shield your personal assets from liabilities. A sole proprietor is personally liable for any debts and other obligations of the business.
You can file for a DBA or a “doing business as” name if you want to have a trade name different from your name, but it still won’t protect you from its legal and financial liabilities. Taxation wise, income earned from the business is filed through the owner’s personal income tax return.
Partnership
Partnership is somewhat an extended version of sole proprietorship. It is when a business is owned by two or more investors and does not incorporate their venture. It does not separate the domain investors from the business as well. Income from this form of business is reported through each partner’s personal income tax, depending on the amount of their share.
Again, financial and legal liabilities are passed through to the partners. Personal assets may be looked into by creditors in case of unpaid debts. There are cases when a partner is also held liable for the other partner’s negligence. Because of the shared responsibilities of partners, it is smart to have a partnership agreement that indicates the share of profit each partner is entitled to, their roles in the business, and the procedure of dissolution. This is to avoid future conflict within the partnership.
Limited Liability Company (LLC)
A commonly preferred business structure, a limited liability company is a hybrid approach of a business entity. In this legal entity, the domain investors are called members and enjoy the benefits of a sole proprietorship or partnership, and the liability protection of a corporation.
By having a single member LLC or a partnership LLC, the domain business is regarded as a pass- through entity when it comes to taxation. This means business income and losses are reported through the personal tax returns of the members. This is in addition to the self employment taxes that sole proprietors and partners need to pay.
Similar to a corporation, members of limited liability companies are protected from the company’s liabilities and debts. Having financial records and a bank account solely for the company is important to maintain the limited liability of members.
State requirements differ in setting up a limited liability company. But here are the basic steps in putting up an LLC:
- Set a business name. Choosing a business name should abide by state regulations. Obviously, you are not allowed to use a name that is already taken. If you wish to have a different trade name than that of your business, you can register for a DBA or a “doing business as name.”
- Designate a registered agent. LLCs need a registered agent for legal correspondence. The agent can be a member or a third-party service hired by the company that acts as a representative of the business in legal transactions.
- Create an operating agreement. Although only some states require this document, this is important to be kept in file and continuously updated. It indicates the role of each member in the domain investing business, how profits and losses are divided, how decisions are made, how members can be added or removed, etc. Clearly, if you are a single-member LLC, you won’t need to have an operating agreement.
- File articles of organization. This is filed through the office of the Secretary of State, and may also be referred to as a certificate of formation or certificate of organization. It specifies the company’s basic information such as: business name and address, nature of business, name of members, name and address of registered agent. Additional data may be needed by some states.
- Pay taxes and fees. Check state regulations on business licenses fees and additional taxes that are required for payment. LLCs are required to have an Employer Identification Number (EIN) if it consists of more than one owner.
Corporation
Owners of a domain investing corporation are called shareholders. It is a business entity considered to be separate from its owners, and managed by a board of directors. Because of the separation, shareholders are protected from any liability and obligations the business may have. If the business has financial or legal troubles, creditors cannot hold the domain investors liable for them.
With regards to taxation, Income generated from this type of business is reported through corporate tax. This is aside from the personal income tax that the shareholders pay based on their income from the business. Corporations must also abide by federal and state regulations. They should have articles and bylaws of incorporation, annual reports, minutes of the organization.
So why do some business owners still consider incorporating despite the double taxation, the paperwork, and the strict regulations? Aside from the limited liability of the shareholders, ownership transfer and access to capital are also two of its benefits. Stocks can be sold to transfer their share of the business to another owner. They can also sell company stocks to raise capital for additional funding. Considering these advantages, corporations can run indefinitely without any disruption.
S Corporation
S-corporation is a tax classification of an LLC or a corporation, but is also considered by some as a strategic business structure. To have a business elected to an S-Corp, it must be a domestic company with not more than 100 shareholders, all of which should be U.S. citizens or legal residents. They must also be individuals, trusts, or estates, and not other corporations or partnerships.
An S-corporation avoids double taxation by not having to pay business tax. Profits and losses are declared through the personal tax returns of the shareholders. By making shareholders employees of the company, they minimize self-employment tax because the business itself pays for it through deductions from their wages.
However, it is important that the salaries received by shareholders are reasonable. It is closely monitored by the government as some companies declare high salaries of shareholders to lower their tax obligations.
Let’s take a look at the table below for better comparison of these business structures.
| Sole Proprietorship | Partnership | Limited Liability Company | Corporation | S Corporation | |
| Ownership | Single Owner | Two or More Individuals | Unlimited Number of Members | Unlimited Number of Shareholders Can easily transfer ownership through selling of shares | Not more than 100 Shareholders Can easily transfer ownership through selling of shares |
| Formation | No Filling Required | No Filling Required | State Filing is Required | State Filing is Required | State Filing and IRS Election are Required |
| Liability | Owner is liable for financial and legal obligations | Owner is liable for financial and legal obligations | Members are not liable for company debt and obligations | Shareholders are not liable for company debts and obligations | Shareholders are not liable for company debts and obligations |
| Taxation | Income and loss are reported through owner’s personal tax return | Income and loss are reported through the partner’s personal tax returns | Income and loss are reported through the members’ personal tax returns, unless elected as a corporation |
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| Management | Owner has full control | Control is dependent on the partnership agreement |
| Managed by board of directors appointed by shareholders | Managed by board of directors appointed by shareholders |
| Funding | Difficulty in loan and credit approvals | Difficulty in loan and credit approvals | Better chance of having loans and credits approved than sole proprietorship and partnership | Selling of stocks can raise more funds | Selling of stocks can raise more funds, but is dependent on IRS restrictions of stock ownership |
| Maintenance | Minimal legal requirements | Minimal legal requirements | Less paperwork and requirements than a corporation or an S corporation | Board of directors, annual meetings, and other annual reports | Board of directors, annual meetings, and other annual reports |
Bottomline
If you are just starting to invest on domain names, and have minimal capital, it may be smart to start with a sole proprietorship. This is the easiest and the most inexpensive business structure to set up. While a sole proprietor has unlimited liability, it is a safe starting ground for testing the waters of the domain industry. This goes for partnership as well.
Aside from the additional capital you get from your partner, you can also test if your business partnership would work for domain investing. Once you have established your desire to expand on domaining, you can then step it up into a limited liability company. This is better for a growing business that needs more funding and has increasing income.
By transforming your domain investing business into an LLC, you get to have a limited liability which safeguards your personal assets from debts and other financial obligations. Corporation and S corporation are already for large businesses.
Although you have more access to funds with these structures, whether through selling stocks or through the easy approval of loans and credits, they are harder to maintain because of the amount of paperwork required, the annual meetings that are necessary, and the presence of a board of directors. It may not be cost-efficient for a small to medium sized domain investing business.
Choosing the right structure for your domain investing business needs careful consideration of your business goals, financial status, and your ability to comply with the legal requirements of the state. It is still best to seek advice from business attorneys or tax professionals to determine the best structure for your business.