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Creating an Online Business: Legal Considerations

We live in a unique time for entrepreneurship. It may seem like anyone can start an online business. But not so fast; this article explains the unique differences online companies have from traditional brick-and-mortar stores. The following is not a step-by-step guide on starting an online business, but does offer some initial considerations. Read on to learn more about online business laws and what concerns of starting a business remain in the age of the internet.

Considerations When Starting an Online Business

Starting a business online exposes you to a global market immediately. We are a far cry away from the days of slowly growing a brand from one location to another. But that immediate access to out-of-state (and out-of-country) customers also comes with unique consideration.

With the various needs you will be exposed to, you will want to know the multiple laws you will have to operate under. Consider the issues below as you create a business plan for your online business. Some common considerations for online entrepreneurs include:

  • Do you need a business license?
  • Do you understand how to collect sales tax nationwide?
  • Do you have a seller's permit to collect sales tax?
  • Do you have a unique name?
  • Do you have a unique domain name?
  • Do you know how to get a unique trademark name?
  • Do you know defamation laws and how they apply if you discuss online competitors or get a false review?
  • Do you have a workable refund and return policy?
  • What shipping restrictions do you need to be aware of?
  • How will you protect your customers' data privacy?

Your Online Business Needs a Business License

Whether online or brick-and-mortar, every business must have the proper licenses to do business in each state. The legal requirements for business licenses vary from state to state. You must become familiar with the area's laws where you are operating a business. The type of licensure you will need will also depend on what kind of industry you are in. Review the online store legal requirements for the state or states where you do business.

Your Online Business Must Collect Sales Tax Nationwide

The laws across the country regarding online retailers have evolved over the years. Before the U.S. Supreme Court decided South Dakota v. Wayfair, online entrepreneurs did not need to collect taxes in locations that did not have a physical location.

Now, you may need to collect sales tax for the states where you sell your products. There is not one single sales tax system. Many small business owners do not have the resources to hire legal counsel to help them understand the various laws about taxes, so you will need to research each state to determine its special sales tax laws.

Your Online Business Must Have a Seller's Permit to Collect Sales Tax

You cannot collect sales tax unless you have a seller's permit in each jurisdiction (location with legal authority) where you need to manage it. Collecting sales tax can be a nightmare, as each state has its own rules and regulations. There may be a sales tax rate for the entire state and additional rates for cities and counties. Further, not all sales are taxed by all states, so it is vital to understand the sales tax rules for each state you do business in.

Every business will need to obtain a tax I.D. number. An employer identification number, or EIN, is required by the IRS so a company can pay federal taxes. You can apply for an EIN without charge on the IRS website, via mail, fax, or over the phone.

Your Online Business Needs a Unique Name

Most states require incorporation before it is considered a business entity. You must create a unique business name and file the proper paperwork with the secretary of state's office. However, you may not have a unique business name ready, but you may be prepared to incorporate it. In that case, you may want to use a fictitious business name as a placeholder.

You must consider the laws for a "doing business as" or DBA name. Using a DBA could be problematic for your online company because some state laws require registering the assumed name in every location where you do business. The problem can be solved by incorporating your business and using the name that it is incorporated under.

Your Online Business Needs a Unique Domain Name

Your new business will need a unique domain name to conduct e-commerce. Because your online business does not have a physical location, online brand recognition will be essential to your business structure. You will need to take orders and have customer service available through your website. Additionally, you will use your website to build a solid social media presence; which, is the backbone of modern advertisement. Your business's domain name is a unique identifier for your site that will allow people to find you.

Your Online Business Needs a Unique Trademark

It is equally important to have a unique trademark name for your online business as it is to have a unique business name and domain name. As you select your business name and domain name, search the United States Patent and Trademark Office database to determine if the name has been taken.

Your Online Business Website Must Avoid Defamation

When you are trying to sell a product, sometimes there is a tendency to tell consumers that your product is better than a competitor's product. Such puffery is acceptable most of the time, but it is possible to cross the line and falsely disparage a competitor or their product. When false statements are made on your website and a competitor loses business. As a result, you could open yourself up to a defamation lawsuit. To guard against defamation, make sure your statements on your website are accurate and don't directly attack anyone.

Before you form your online business, consider researching different business structures. For example, if your online business is formed as a limited liability company, you may be able to protect your personal assets in case of a lawsuit. Find an attorney or law firm in your area that specializes in business formation here.

Your Online Business Must Create a Refund and Return Policy

Federal and state consumer protection laws require businesses to have stated refund and return policies. Merchants are not necessarily required to accept returns or refund money, but there are state laws that require the disclosure of such policies.

Learn About Shipping Restrictions

Certain items require special shipping considerations. For instance, the U.S. Post Office lists items that cannot be shipped domestically or internationally.

Hazardous goods and materials can be shipped, but special handling is required. Further, there are prohibitions about shipping certain items to certain countries.

Your Online Business Could Be Affected by Data Privacy Issues

When starting your online business, you may want to capture and retain personal data from your customers. If you collect personal information, you must have a privacy policy posted on your website.

Data privacy has become a considerable concern, and both federal and state governments have passed laws to protect consumers. Of particular concern is the privacy of children. If your online business markets to children, you need to be aware of the Children's Online Privacy Protection Act.

Even if you do not sell goods or services internationally, it is possible that your business could be subject to the data collection rules of the GDPR. The GDPR prohibits the collection and retention of personal data without consent. Such data collection can occur automatically through the use of cookies. You may need to have a disclaimer on your website about the use of cookies if there is a chance that your website could collect data from a citizen protected by the GDPR.

Starting an Online Business? Get Legal Help

Your business idea may be perfect for an online business. For answers to frequently asked questions about business formation, please visit FindLaw's do-it-yourself section, or contact a local business and commercial attorney for guidance and advice on forming an online business.

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