Online trading companies
An online trading company is a trading company that primarily operates via the internet and its electronic commerce tools. Much like any regular trading company, online trading businesses specialise in buying goods from manufacturers and selling them on to consumers or other retailers. However, the online nature of this business makes it different, presenting specific benefits and limitations. Selling goods online offers huge opportunities and advantages, allowing you to trade on a global scale and save on organisational and administrative costs such as wages, office rent and others.
The main difference is that a 100% online trading company (without any physical shops whatsoever, just headquarters and storage facilities) needs a virtual rather than a physical infrastructure. An offline trading company needs offices, shops, storage units and a logistics network linking suppliers, offices and outlets; an online trading company requires offices, storage units, powerful servers and websites, as well as a flexible logistics system that allows it to serve customers scattered across many locations.
As you can see, online trading companies require less physical infrastructure, but they must also be a lot more flexible in serving their customers. Moreover, while for a regular trading company a website is a beneficial addition, for an online trading company it is an essential tool, without which the enterprise cannot function — hence the high requirements for the capabilities of the website and the host server.
Functions of an online trading company
The main function of an online trading company is to purchase goods from a manufacturer and sell them on to retailers and consumers. A secondary, but nonetheless essential, task is to deliver the goods to customers, as usually online trading companies lack physical infrastructure, such as shops, outlets and other points of sale.
To buy and sell goods, an online trading company must set up a hub for transferring products from manufacturers to customers. In this case, that hub is a website. Just as a physical shop requires designers and marketing specialists to arrange and present products in the most advantageous way, a digital shop also requires specialists to guide customers through the possible buying options.
As for delivering goods, an online trading company can choose to either establish the delivery network itself, or outsource this task by entering into a contract with a logistics company. The online trading company then hands over its goods to the logistics company, which takes care of delivering the goods using its own network.
Key aspects of trading online
Although the goods or services sold by online trading companies will vary, there are some common elements due to the specific ways in which these companies market and sell their final products. Here are some of the main issues that you will encounter, regardless of what you are selling online.
A special category of online trading business is EU distance selling. E-commerce has made huge gains in Europe, and the online market is growing year-on-year. However, every retailer must understand the implications of e-commerce in the EU in terms of VAT. VAT rules are quite different for online sellers; for example, there are different thresholds for VAT registration (e.g. GBP 70,000 for the UK, EUR 35,000 for Poland or Italy, EUR 100,000 for Germany). There is no minimum threshold for providers of digital, electronic and broadcast services, who must apply VAT at the rate set by the country where the consumer is located.
Online stores and websites
Naturally, a website is an absolute must for any online business. Designed as an online store (describing the range of products available, their prices and features), the website must also include the following important sections:
- Delivery and returns policy
- Contact page, with a phone number, address, email address and other contact information for consumers to use
- Online payment options
Online payment solutions
A way to accept online payments is by far the most important consideration for an online business. Your consumer must have a way to pay for your products and services instantly and securely. There are two basic ways to accept payments on your online store:
- By using an online payment system, for example PayPal
- By using a merchant account to accept direct credit card payments
A merchant account is a special bank account opened for online business purposes, in order to facilitate secure transactions between merchant and customer. Merchant accounts are set up by agreement between the bank and the merchant and they allow you to accept payments in many ways, usually by credit or debit card. Banks are actually not the only entities that can set up merchant accounts; this can also be done by other financial service companies that process credit card payments. Click here to read more about setting up a merchant account.
Online trading company registration
As an online trading company is no different from a regular trading company in the legal sense, the registration process is almost identical.
First, you need to register a company. As a trading company is mainly distinguished by the nature of its business, not by its legal structure, registering a company is the first step here, as with any business. This includes all the necessary incorporation procedures such as registering for tax, registering for social security, etc.
Next, a newly registered company must check the import/export policy of the jurisdiction, especially if it is planning to import and/or export products from/to foreign markets. In some jurisdictions, this is a simple procedure — e.g. in the EU, all goods imported from other EU member states are considered to be free circulation goods, and are not subject to customs procedures or extensive documentation requirements. In other countries it may be more difficult, e.g. a trading company in India must register for an Importer Exporter Code with the relevant authorities.
Furthermore, a trading company must acquire the relevant trade licenses if the jurisdiction in question has placed limits on the distribution of the goods it intends to sell. For example, in most countries there are certain restrictions on the sale of alcohol and tobacco products. It is especially important to check for restrictions on foreign-owned companies, as they may require a separate set of licenses to trade in a certain jurisdiction or their activities may be limited in other ways.
To find out about the requirements in the jurisdiction of your choice, please contact Confidus Solutions.
Additionally, an online trading company will need to set up a website, as this is the basis for any kind of online trading. This includes registering a domain name, hosting the site on a server and the actual site development work.
Popular jurisdictions for online trading companies
In this article, we have emphasised the need to understand the VAT liabilities of online trading companies. If you would like your clients to pay for goods and services through your website with EU-issued Visa and Mastercards, it is essential that the merchant account is located in an EU bank, and your company must also be registered in the EU. The following jurisdictions are popular choices for incorporating online trading companies:Gibraltar: Gibraltar is located in the EU, but has not signed up to the EU VAT Directive and is therefore outside the scope of VAT. Companies registered in Gibraltar can set up online stores and connect to merchant accounts at EU banks. The United Kingdom: UK companies (Scottish LP, UK LLP and UK Limited) are commonly used for online trading. These structures are easy to operate and VAT thresholds are quite high. Malta: A Maltese company with a VAT number is a great solution for a solid online business, allowing you to comply with the strict requirements of the VAT system at a lower cost, as the VAT rate (19%) is lower than in many EU countries and the corporate tax system allows non-resident company owners to claim back 6/7 of the tax paid, making the effective rate only 5%.
Selling online opens up vast business opportunities, but nowadays every business must consider the tough AML requirements imposed by processing companies and banks, taxation matters (especially in terms of VAT), the time-consuming set-up process for online payment solutions and many other complex issues. Contact us to discuss online trading options for your business.
Top three famous online trading companies
As of 2016, the world’s top three holding companies by trade revenue are:
- Wal-Mart Stores, Inc.
Amazon.com is a renowned international online trading company (revenue of 107 billion USD) and a classic example of this kind of enterprise. The company both purchases goods for resale and allows third-party sellers to use the platform to sell their own products. Amazon.com hosts a number of websites and storage facilities throughout the world, providing localised services for each country or general region.
ASOS.com is a fashion and beauty online trading company based in the UK. As well as offering more than 850 brands, ASOS sells its own products, catering to customers all over the world from its main warehouse in Barnsley. The company has additional warehouses in China, Europe and the USA, which are used to ship goods to over 140 countries.
Wal-Mart Stores, Inc. is a retail corporation selling a wide variety of goods, from groceries to electronics. Walmart (its trade name) is a hybrid business in the sense that it combines both online and offline trading. Besides owning almost 11 500 stores worldwide, the company also offers the possibility of buying goods through their online store and manages delivery. By being active in both offline and online trading, Walmart is able to compensate for the disadvantages and capitalise on the advantages of both models.