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Legal Requirements for Starting a Small Business

5 legal requirements for starting a small business online in 2021

As you may know, starting an online business presents a 24-hour opportunity to make money and operate from anywhere in the world.

Plus, it doesn’t have the traditional startup hurdles that many traditional new bricks-and-mortar businesses face. However, the legal requirements for starting a small business online and a valid contract can be daunting when you’re not sure where to start.

If you have turned your business idea into a business plan and are ready to set up online or move your existing business online, this article can help you understand the legal and tax requirements involved in starting an online business. This including the business permits you’ll need and how to go about getting them.

To close out, we’ll recommend legal services offering support for small businesses.

Step 1: Business Structure

Choosing your online business structure is the first legal requirement you need to meet, and this needs to be decided before registering your business in your state. This will determine some critical information you need to consider, such as what taxes you need to pay, your day-to-day business activities, and how much your possessions are at risk.

If you need help with setting up your business structure, you might want to look into these services:

Here are some of the most common structures for an online business just starting:

Sole Proprietorship

A sole proprietorship is a simple business structure that gives you complete control of your business. It can be suitable for low-risk businesses and single owners who want to test run their business concept before starting an official business.

If you carry out business activities but do not register as a particular type of business, you’ll automatically be considered a sole proprietorship.

With this structure, your business assets and responsibilities are not detached from your personal possessions and legal obligations; therefore, you can be considered personally accountable for any arrears and responsibilities of the business.

Limited Liability Company

An LLC is the simplest structure for ‘solopreneurs’ with a small online business. It separates your assets like your home and savings from your business assets. In most cases, you are personally protected from any bankruptcy or lawsuits filed against your business.

LLCs allow you to file your business and personal income taxes together. However, its members are classified as self-employed; therefore, they must contribute to Medicare and Social Security.

This structure can be suitable for business owners with personal assets they wish to protect and owners wanting to pay a lower tax rate than necessary with a corporate structure.

Corporation

A corporation, also called ‘C corp,’ is a legal entity that stands on its own and is entirely separate from its owner and shareholders. It can make a profit, be taxed, and face legal liability. Out of all business structures, C corp offers the highest level of personal protection from liability.

However, they are more complicated and costly to form. They also require you to do a lot more paperwork in the form of extensive recordkeeping, financial reporting, and other administrative duties of that nature.

C corps can be suitable for businesses that need to raise money or eventually plan to be sold.

Legal Requirements for Starting a Small Business

Step 2: Name Your Online Business

Once you’ve chosen a business structure that offers you the right balance of benefits and legal protection, you’ll need to register your business name.

When thinking about a good name for your business, consider that it should represent the essence of your brand, is memorable, and is an apt description of the goods and services you offer.

Once you’ve decided on your business name, there are four different ways to protect it, each serving a different purpose.

Domain Name

As an online business owner, you’ll need to register a domain name from services like NameCheap, Domain.com, or GoDaddy. This will form part of the web address where your website will reside. Once you register a domain name, it will be yours as long as you continue to pay the required fees.

It doesn’t need to be the same as your legal business name, trademark, or DBA (Doing Business As). The best domain names include keywords that your target audience uses on Google to find businesses like yours, are easy to spell, and are unique.

Entity Name

An entity name registration protects your business name at the state level. It is how your state classifies your business. Depending on your state and business structure, you may be required to register a legal entity name.

Typically, this type of registration will protect your business by preventing someone else in the state from operating using the same name.

Trademark

Registering your business name as a trademark protects the business name and your offerings at a national level. With trademark protection, businesses in your industry operating in the US will not be able to use it.

As a business owner, you’re open to possible trademark infringement lawsuits. Use this US trademark database to check whether the business name you want to use hasn’t already been trademarked.

Doing Business As (DBA)

You may need to register a DBA name in the state where your business is located. Doing this alone does not provide legal cover, but some business structures require that you use this method.

With a DBA, you can conduct your business using a different identity than your formal business name. Also, with a DBA and a federal tax ID number (EIN), you can open a business bank account.

Step 3: Purchase Your Domain and Web Hosting

As well as buying your domain name, you’ll need to buy/rent a space on the internet to allow access to your online business. This service is delivered by a web hosting provider.

Hosting providers offer a range of beginner hosting plans with reliable services to meet the needs of small businesses. When choosing the right web hosting plan to cover the functionality of your website and meet your budget, here are some basic things to consider:

  • The performance of your website, e.g., quick response times. Your customers, prospects, and visitors will appreciate it when your website delivers what they want quickly and seamlessly
  • The uptime guarantee. Can the hosting provider guarantee that your website will be available at least 99.9% of the time, and how will you be reimbursed if your website is down for some time?
  • How secure will your website be? What happens if your website is hacked? If there is a disaster, how quickly can your site be up and fully functional again?

Reputable web hosting providers such as HostGator and Bluehost provide web hosting and domain name registration for new online businesses. For a single website, plans start at $2.75 and $2.95, respectively, per month.

Step 4: Sales Tax and Licensing

Sales tax is a ‘money spent’ tax (consumption tax) to be paid on the sale of goods and services. Your business will be liable for sales taxes in the state where your business presence is, for example, a physical building, employees, or some other type of business presence, depending on the laws in that state.

If your business is going to operate entirely online, you might not need to pay sales tax, but you’ll likely need to pay Use Tax. It’s the same fee as sales tax and needs to be paid in instances where a tax wasn’t charged on an item sold, and the buyer’s home state enforces a sales tax.

Sales tax licensing is also recognized in some states as registration, which is a contract with the state tax agency to collect and submit sales tax on products sold by your business.

If you have a business presence in a state and no sales tax license, you could face heavy fines, legal battles, and business closure.

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How to Register for a Sales Tax License

The following are general steps on how to register your business to collect sales tax:

  • Have your Employer Identification Number and all your business ID documents on hand
  • Navigate to your state’s Department of Revenue website
  • Find the ‘Sales and Use Tax’ page or section
  • Select the link to begin registering your business

Step 5: Launch Your Website

Once you’re happy that your business website looks great and will aesthetically please and encourage your target audience to do business, before going live, try to have as much of the following in place as possible:

  • Ensure it is optimized for mobile devices. Site visitors are more likely to return to your site when it’s optimized for mobile
  • Ensure your pages are SEO. This is necessary to put your business in front of your customers by ranking higher in Google searches
  • Ensure you have clear and user-friendly calls to action. Make it easy for your first-time visitors to convert.
Legal Requirements for Starting a Small Business

FAQ

Do I Need an LLC to Sell Online?

No, you don’t need to structure your business as an LLC to sell online. When no business structure is in place, your business will be deemed a sole proprietorship.

What Documents are Required for Online Business?

The following are some of the typical e-commerce business licenses required for most online businesses to comply with regulations and tax requirements.

Remember that the legal requirements for starting a small business online can vary from state to state, so always check with your state’s licensing authority first.

Business Operation License

This allows an e-commerce business owner to conduct business in the city, county, or state where they reside. Nearly all businesses will need a business operation license in some form to legally operate.

Doing Business As (DBA) License

This license allows you to run your online business under a different name from your own.

Employer Identification Number

The IRS will issue this federal tax ID number to identify your business as a separate tax entity.

Seller’s License

Most states require a seller’s license to sell goods or services online. However, the specific requirements and fees are state-dependent.

Sales Tax license

If you sell taxable services and products from home, a sales tax will apply to what is sold.

Home Occupation Permit

If you are operating from home, this license will prevent you from having to get commercial property licenses, though it doesn’t offer exemption from all licenses.

Occupational License

This license depends on the type of industry your business is in and the work you do. An attorney, for example, will obtain an occupational license to conduct business and establish credibility.

How Much Does It Cost to Trademark a Business Name?

At the federal level, the cost to trademark a name typically ranges from $225 to $400, excluding legal fees. A state trademark typically costs around $50 to $150.

Can I Start an Online Business Without Registering It?

No. You will not be able to use your business name legally without registering it first.

Recommendations

LegalZoom

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Pros

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  • They do not offer one-off legal advice; some services are only available if you sign up for a monthly plan
Legal Requirements for Starting a Small Business

Rocket Lawyer

Rocket Lawyer offers small to medium-sized businesses access to customizable legal documents and attorneys. Since 2008, they’ve been making legal care services affordable and accessible. You can either purchase a one-time service or create an account for ongoing access to services.

Pros

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Cons

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Legal Nature

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Pros

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Cons

LegalNature isn’t the solution for you if you require personalized legal advice.

All Your Legal Requirements for Starting Your Business Online

Rocket Lawyer is our clear winner here for access to attorneys and customized legal documents. We think that new online business owners would benefit from having the option to access their services on a one-off basis, as in the very early business setup stages, committing to an account subscription may not be necessary. Knowing that your access to professional legal documents or advice is only a click away can be reassuring.

We hope that you’ve taken away some helpful information on the legal requirements for starting a small business online, and we wish you every success in your new online business venture.