For already existing businesses, you can hop on down to taxes. If you’re starting from scratch, it’s time to think about the legalities of setting up your business. Just because your business is going to be online doesn’t mean you are free of legal entanglements; sometimes, there are more rules than there are for site-based businesses.
Business Licensing
One of the first questions I usually hear is, do I need a business license to sell products online? Whether you need a business license or not is usually pretty simple for physical stores. However, online stores also often need a license. The problem is that even when you call your state or local government, you might get different answers from different people.
Each state, county and municipality will have different rules, and some may not have internet-specific rules, so they shoehorn licenses based on other factors. If you have any trouble getting a straight answer from your government departments, it’s best to consult with a lawyer to make sure you get the right license for your location.
Pick a Type of Business
A big part of starting a business is deciding on the business type. How you set up your business can affect tax burdens, privacy and protections for your personal property if you are ever sued. The most common business types are sole proprietorship, limited liability company (LLC) and S-corporation. While sole proprietorship rarely requires any official paperwork, setting up LLCs and S-corporations does require paperwork.
LLC formation in any state can be done yourself or you can use an LLC service to handle most of the form filing. For S-corporations, you’ll need to fill out form 2553 with the IRS and there are certain operating rules that must be followed. It’s always a good idea to talk to professionals such as lawyers or qualified counselors through the local Small Business Administration brand about your specific situation before deciding on a business structure type.
Taxes
Online businesses must deal with income taxes and sales taxes. The first step in dealing with income taxes is to keep separate accounts for all of your business finances. You’ll also need to keep great records, and I always recommend consulting with a tax pro before starting.
Sales taxes are a bit more complicated online. Originally, online businesses had to have a physical presence in a state before becoming subject to sales tax. However, many states quickly started shifting that burden to customers, requiring them to report online purchases and pay taxes when filing income tax returns.
Fast-forward a bit, and states started requiring online businesses to collect sales tax regardless of physical location.
The arguing eventually led to a Supreme Court decision in South Dakota v. Wayfair, Inc., where the Supreme Court ruled that customer location and sales volume would be the test. Initially, many small online sellers went out of business or moved exclusively to third-party marketplaces that handled the sales tax because juggling different tax rules for every state was beyond the capabilities of individual sellers.
Eventually, new software and services popped up to allow automation of managing the rule patchwork, and e-commerce recovered. However, it can still be a confusing topic for new online sellers.
Each state has a different threshold for tax nexus status and how many sales or how much revenue triggers the need to collect sales taxes in that area. Because of that, I always recommend using a platform that includes automated sales tax compliance for new stores.
