Starting a new online business can be an exciting time, giving you the potential to earn extra income by being your own boss. But in setting up your company, some online business laws and regulations can easily be overlooked. When establishing your online business, ensuring you have the right licenses is crucial. For those involved in selling goods, understanding and obtaining a reseller certificate is a key part of this process.
So we’ve put together this comprehensive guide to acquaint you with common online business laws, including consumer protection laws, shipping policy, and government regulations.
We’ll also discuss what you should consider to protect yourself against potential legal issues and recommend three online companies that offer direct access to professional legal services.
Taxes
Income Tax
Income tax is the tax you pay on your income. It is a required part of all types of businesses, even internet-based ones. Small online businesses operating as sole proprietorships will have the income they make taxed under the category of ‘self-employed.’ Online transactions can be traced, and failure to make income tax contributions can result in criminal penalties.
Sales Tax
Sales tax is a tax on the sale of goods and services. Your online business is responsible for collecting sales tax in a given state, depending on the laws in that state and if you have nexus there. For example, a physical building like a warehouse or an office, an employee, or some other form of business presence determines your state of operation.
Some states classify online businesses as mail-order businesses and do not require sales tax. However, the online business laws differ in every state and are subject to change without notice. Keep up with legislation on sales tax laws in your state by contacting your state’s department of revenue.
As well as your business’s physical presence affecting sales tax nexus, here are the other most common factors.
- An ‘economic nexus’ is a certain number of transactions or a specific dollar amount in sales. If your website includes links to generate prospects and new business, this is called a ‘Click-through nexus’
- An ‘affiliate nexus’ is when you’re associated with an individual or business in the state, and sales are created through this connection
- Web cookies, if you’re using web cookies or software on in-state devices
Remember, all these government regulations are jurisdiction-based. Always check with your department of revenue first.
Bench offers various bookkeeping plans that depend on the size and type of your online business. You can also use them to prepare your financial reports for tax purposes.
Payment Gateways
A payment gateway facilitates credit card payments for all business types by transferring information between a payment portal such as a website and the receiver.
Fraud can occur when a buyer uses bogus payment details to make a purchase. Unfortunately, it’s often too late to collect retribution by the time this fraud is discovered, leaving you to foot the bill. Fraudsters are also known for being dishonest by claiming the product they ordered has not arrived.
It is essential to choose a reputable payment gateway service to help expose fraudulent activity. Also, by monitoring your business activity, you can stay one step ahead. Consider reliable payment gateway companies like PayPal, Fiserv, and Square.
Trademarks, Patents, and Copyrights
Intellectual property is creative work or ideas of the mind in a form that can be shared or provide support to others to recreate. Trademarks, patents, and copyrights are three ways to legally protect your intellectual property.
Trademarks can be a word, a design, or a phrase, or a configuration of those elements that distinguishes your goods or services and indicates the source. E.g., Apple computers or McDonald’s. Registering your trademark protects it from being used by someone else without your consent or from someone using one similar to yours with associated goods or services.
A patent could be applied to a technical invention, e.g., unique machine designs that are usable in an industry, such as the lightbulb, the telephone, or the computer. A patent protects your inventions and processes from being replicated by others or your invention being traded without your permission.
Copyrights can be applied to artistic or intellectually created work, e.g., music, movies, and paintings that are original and presented in paper or digital format. Copyrights safeguard your sole right to circulate, perform, or exhibit created work and stops others from replicating or exploiting your creation without your permission.
If you're looking for assistance with trademarks, services like Direct Incorporation, Bonamark, or Lubenda can help your online business.
Shipping Restrictions
When shipping restricted items, they should be packaged and labeled according to your shipping carrier’s requirements. It will also cost more since additional packaging and services are needed to ensure safe transportation.
Shipping restrictions differ by courier. Check out the following list for information regarding special shipping policy restrictions.
Alcohol
You can ship alcoholic drinks, though it depends on which type and where it’s being shipped to. Also, your alcohol needs to be labeled and packaged correctly and received by an adult over 21 years old. You’ll also need a license for law compliance.
Delicate Items
You’ll be responsible for ensuring that fragile items are packaged sufficiently to avoid damage. If your delicate item is worth over $100, it’s essential to get shipment insurance to cover damages caused by delivery.
Perishables and Food
Shipping policy for perishable goods and food will vary by courier. For example, USPS states that perishables that decompose easily and cannot reach the destination without decaying are restricted. Baked food should be able to survive normal mailing conditions like unregulated temperatures and should not cause an offensive odor or nuisance.
Firearms and Hazardous Materials
Restrictions for these items depend on the type of firearm and, again, the carrier/s shipping policy.
Tobacco
These items are rigorously restricted. Many couriers forbid tobacco shipments to individuals. Tobacco shipments, in most cases, are only allowed between licensed businesses or regulators.
Live Animals
Shipping of the following types of live animals will most likely not be permitted:
- Warm-blooded animals
- Reptiles
- Poisonous spiders or insects
Shipping Policy and Regulations on Shipments
For an e-commerce business, it’s essential to understand shipping policy and regulations because:
- You can benefit financially through understanding them, and
- You can face fines and legal issues if shipping regulations are violated
The mail, internet, or telephone order merchandise rule enforced by the Federal Trade Commission (FTC) is critical for small businesses shipping products. According to the FTC website, if this rule is violated, your business could be sued for up to $42,530 per violation at any time during five years after the complaint has been filed.
However, if you find yourself in a situation where your business is facing legal action such as a lawsuit, finding a great litigation lawyer can help. Indeed, an expert litigation lawyer can help fight your side of your case in court and help you secure a more positive outcome. Additionally, by working with a litigation lawyer in the beginning stages of setting up your business you can create systems that will ensure you minimize any risk of being liable for a lawsuit as you operate.
The FTC's Mail, Internet, or Telephone Order Merchandise Rule
This rule demands retailers have a reasonable delivery time frame advertised. When no time is specified, the expectation is within 30 days. Ensure your shipping transporter has included a clause to cover a refund policy for late deliveries into its contract. In addition, you’ll need to follow your shipping carrier’s regulations for weight, size, and allowed packaging materials.
Shipping Delays
To avoid potential legal issues, you’ll need to let your customer know about a delay to an expected delivery time. If they do not consent, then you’ll owe them a full refund. This rule protects customers from businesses being dishonest about shipping dates.
Failing to let your customer know about a new shipping date and refund options is a violation of this rule and could get your business into trouble for not shipping within a stated time frame.
The upside to this is the potential to gain money when working with major shipping companies, including UPS, FedEx, Canada Post, and the like, since their contacts include a reimbursement policy for packages delivered late.
Inventory
Will your business be solely home-based? If you are selling physical goods, you’ll need to know what laws are in place for storing inventory in your home.
If you find that there are restrictions on the amount of stock you can have in your home legally and investing in a warehouse or some other physical location is not an option, you might consider dropshipping to cut out the need to store inventory.
Dropshipping
Once you’ve sold an item on your website, you arrange to have the product sent directly to your customer instead of having products delivered to you first before sending them to your customers.
This removes the tasks of storing, managing, and sending inventory. As a result, you’ll save money on postage, storage, and, if necessary, an extra workforce to process orders.
Age Restrictions
Your website will need to comply with the Children’s Online Privacy Protection Act (COPPA). This act pertains to the virtual collection of private data by persons or entities in the US of minors under 13, including children outside of the US, if the business is U.S.-based.
It specifies what your website must contain in a privacy policy:
- How and when to pursue provable consent from a parent or guardian
- The duties you have to protect a minor’s safety and privacy online
Although legally, children under 13 – with their parents’ consent – can provide personal information, many websites (social media sites, particularly) disallow minors under 13 from using their site altogether to save on the work and cost necessary for law compliance.
Business Insurance
If you sell products online, you’ll need business insurance for protection against costly legal issues. If you operate from your home, you will not be covered by a home insurance policy. Here are some business insurances for you to consider for your online business.
Business Owner’s Policy
BOP is a good starting point for online business insurance coverage since it combines three policies into one:
General Liability Insurance
Protects against claims of personal injury or property damages.
Commercial Property Insurance
If you own or rent a physical location, it helps protect the building and tools used by your business.
Business Income Insurance
Covers lost income if you cannot operate due to circumstances out of your control, e.g., lost connectivity to your website due to adverse weather conditions.
Cyber Liability Insurance
You’ll likely be gathering confidential customer information in the form of credit card details and addresses. If this information is lost or stolen through a data breach, Cyber Liability Insurance will cover the recovery and business continuity costs involved.
Product Liability Insurance
This helps protect your business if a legal claim is filed against you, or there has been personal harm or damages to someone’s property due to them using something you’ve sold them. For example, if a customer purchases a portable radio from you that overheats and they burn themselves, your business could be liable for their injury and medical costs.
Online business insurance is essential to taking care of the legal hitches that can arise in running a business. Some insurance services you might want to look into are Hiscox, Tivly, and State Farm.
Licenses and Permits
If you operate solely online, your business may still require some of the licenses and permits required by businesses operating from physical locations.
A ‘Seller’s License’ is required by nearly all states, and for most online businesses selling goods or services, the details vary by state. This license is required even if you are selling intangible products or services such as digital books. Check with your state’s Department of Revenue or Licensing Office to ensure you get the appropriate permits. Here are some of the other licenses worth considering:
Doing Business As
You may also need to pay for a DBA license. This will allow you to conduct business using a name other than your own.
Professional Trade Licenses
Covers financial planning and insurance-type services.
Health Inspection Certifications
These cover you if you’re offering services in the catering and food industry.
PCI Compliance
Payment Card Industry compliances are standards and guidelines for businesses managing and securing credit card-related personal data.
As an online business owner, security and customer privacy should be your priority. Since you’ll be receiving and retaining customers’ sensitive data and credit card payment information, keeping this data out of the hands of cybercriminals is paramount.
Government regulations stress that online businesses have information security in place and a way to avoid legal issues. This will save the banks millions of dollars and also help build a good reputation for your business.
As your company grows, depending on the amount and type of information you receive, you may be subject to federal and state privacy laws.
Privacy Policies
Your website’s terms and conditions should explain to customers that they are entering into a contract when purchasing goods from your website. As well as outlining terms of delivery, refunds, and payment information, it should stipulate the type of personal information you’ll be collecting from them and how it’ll be used.
Your site should have an option to check a box to indicate that they’ve read and understood the data collection explanation you’ve provided.
If you're looking for a privacy policy for your website, you can have a look at Legal Templates.
Online Retail Consumer Protection Laws
The ‘Computer Fraud and Abuse Act’ criminalizes:
- Accessing a computer or computer network without the owner’s permission
- A threat to damage another’s computer equipment
- Stealing computer data
- Ransomware
This act is to deter cybercriminal activity and protect you as a legally liable online business owner against data breaches by safeguarding your customer's data.
Restore Online Shoppers’ Confidence Act (ROSCA)
As well as other regulations, this law prohibits ‘data pass.’ This occurs when a customer makes a purchase, and a third party is used to process the payment, which could result in the third party selling the customer’s data.
FAQ
What Products Cannot Be Sold Online?
The following list of products are typically prohibited from being sold online:
- Firearms and hazardous materials
- Live animals
- Tobacco
- Perishables
- Fresh fruit and vegetables
- Prescription drugs
How Can I Legally Sell Online?
Here are some standard business licenses that will allow you to sell online legally:
Business Operation License
This will allow you to conduct business in your state, county, or city. These licenses are relatively easy to obtain, although they possibly require a small fee.
Seller’s Permit
This is required for most online businesses to legally sell goods or services. In addition, this type of business license is required by nearly all states, even if you sell digital or other nonphysical products or services.
Sales Tax
You’ll be required to obtain a sales tax license to make tax contributions on selling taxable products and services.
Employment Identification Number (EIN)
This federal tax ID number is supplied by the IRS to distinguish your business as a separate tax entity. EIN’s are not technically licenses, but they ensure your business collects payroll tax and is compliant.
Doing Business As (DBA)
This is a license that allows you to conduct business under a name other than your own.
Bear in mind that licensing and legalities differ by state. To keep up with the proper licensing, you need to be able to sell legally online. Check with your state’s licensing boards.
Do I Need a Seller’s Permit for Online Sales?
Yes. In most states, you are required to obtain a seller’s permit when selling products or services via your online business. The primary reason for this permit being part of government regulation for online businesses is to assist them in collecting sales tax on transactions.
The procedure for getting one varies, but typically you can obtain it from your state’s government agency. Failure to obtain one could result in hefty fines and penalties.
Recommendations – Our Top Choices
As an online business owner, you might at times need legal advice. We going to take a look at some of the best legal services to use when legal advice is needed:
LegalZoom
LegalZoom strives to make online legal services uncomplicated and reasonably priced. They aim to help small business owners and families create legal documents online without hiring an attorney. They are well-known in the industry and trusted by nearly 4 million customers.
Pros
- In operation since 2001, their experience is matched by very few of their competitors
- They offer online access to tax professionals and business evaluation services, which most of their competitors don’t
- Their rates are lower than most of their competitors, offering comprehensive online legal services, starting at $31.25 per month for business customers
Cons
Their customer service quality is not excellent. Customers have described their customer service experiences as inconsistent.
Rocket Lawyer
Rocket Lawyer, founded in 2008, is a fast-growing company providing online legal services. So far, its benefits have been used by more than 20 million small businesses and individuals. From their website, they provide access to a variety of legal resources by connecting customers with attorneys. In addition, their services are offered at a low fixed cost.
Pros
- They offer an online question and answer service for direct legal advice from experienced attorneys
- Their form builder for custom legal documents and contracts is intuitive
- They score highly in the excellent customer service department and offer phone, email, and live chat assistance
Cons
Their membership fees are slightly higher than their competitors; e.g., they charge $39.99 per month, whereas LegalZoom charges $31.25 per month for an annual plan.
Legal Nature
Legal Nature provides access to custom legal state-compliant documents. They are a trusted brand with over 3,000 five-star reviews on Trustpilot. You can create a customized legal form in minutes by following their four simple steps.
- Select the document you want
- Answer a series of questions to customize it
- Review your form
- Upload it
Pros
- Professional well-written legal forms
- Perfect for people not wanting to hire a paralegal or attorney to create the documents
- Available in accessible Word or PDF formats should you wish to have a third-party legal professional look over them
Cons
They provide an online tool for you to create legal documents yourself. They do not offer personalized legal advice service
My Company Works
Forming your new online business is speedy process with My Company Works. They handle most orders by the next business day. However, some states take longer than others to process the paperwork. So if you need legal advice on how to form an online business, they can provide you with online legal support.
Pros
- They provide new business formation services for all 50 states
- Currently they have an A+ rating with the Better Business Bureau
- Have helped over 40,000 business so they have a good reputation
Cons
They provide lots of information and guides which might be a little overwhelming at first
Understanding Online Business Laws and Regulations
Rocket Lawyer has impressed us the most out of our top recommendations for direct online legal services. Though slightly more expensive than their competitors, they make up for this in the quality of services they provide.
We like that they offer a Q&A service, perfect for new online business owners needing quick answers from legal professionals. They also consistently receive high scores for excellent customer service.
When you start to consider the privacy policies, consumer protection laws, and government regulations involved in starting a new online business, it can be a bit overwhelming.
We hope that our introduction to online business laws and regulations has been helpful in clearly letting you know what is required to protect yourself and start your online business legally.
