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Creating an Online Business: Legal Considerations

We live in a unique time for entrepreneurship. Anyone can start an online business. But not so fast—there are additional things to consider.

This article explains the unique differences between online companies and traditional brick-and-mortar stores. The following is not a startup guide on starting an online business, but it offers some initial considerations. Read on to learn more about online business laws and what concerns about starting a business remain in the internet age.

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Initial Questions To Ask When Starting an Online Business

Starting an e-commerce business immediately exposes you to a global market. You can also accept credit card payments instantly. There's no need to grow a brand from one location to another slowly. But immediate access to out-of-state (and out-of-country) customers comes with unique considerations and concerns.

Given your various needs, you'll want to know the multiple laws under which you must operate. Consider the issues below as you create a business plan for your online business, even if you operate a sole proprietorship.

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 that can be trademarked?
  • Do you have a unique domain 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?
  • Have you set up a bank account? Will you use a local bank franchise or a national chain?
  • Will you accept PayPal, Venmo, or credit cards? What about payment plans?
  • Is the type of business something you can easily sell online?

Once you answer these initial questions, you can begin forming a legal structure for your e-commerce store.

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 laws of the area where you are operating a business. The type of licensure you'll need also depends on what kind of industry you are in. Review the online store legal requirements for the state or states where you conduct business.

Your Online Business Must Collect Sales Tax Nationwide

The laws regarding online retailers across the country have evolved over the years. Before the U.S. Supreme Court decided South Dakota v. Wayfair, online entrepreneurs didn't need to collect taxes in locations without a physical location.

You may need to collect sales tax for the states where you sell your products. You can apply with that state's department of revenue. There isn't one single sales tax system. Many small business owners don't have the resources to hire legal counsel to get legal advice to understand the various tax laws. That means you must research each state to determine its special sales tax laws.

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

You can't collect sales tax unless you have a seller's permit in each jurisdiction where you need to manage it. Collecting sales tax can be difficult, 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. Services are not always taxed. You must understand the sales tax rules for each state you operate in.

Every business will need to obtain a tax I.D. number. The Internal Revenue Service (IRS) requires you to have an Employer Identification Number (EIN). This allows your company to pay federal taxes. You can apply for an EIN for free on the IRS website. Do not pay for an EIN on any other website.

Your Online Business Needs a Unique Name

Most states require incorporation before a business entity is legally recognized. You must create a unique business name and file the proper paperwork with the secretary of state's office. But you may still need to get a unique business name ready. 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 it's 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 has no physical location, online brand recognition will be essential to your business structure. You'll need to take orders and have customer service available through your website. You'll also use your website to build a solid social media presence. 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's 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 is in use.

Your Online Business Website Must Avoid Defamation

When trying to sell a product, sometimes there's a tendency to tell consumers that your product is better than a competitor's. Such puffery is usually acceptable. Still, it's possible to cross the line and falsely disparage a competitor or their product. A competitor can lose business when you make false statements on your website. This could open your business up to a defamation lawsuit. To guard against defamation, ensure your website statements are accurate and don't attack anyone.

Before you form your online business, consider researching different business structures. For example, suppose your online business is a limited liability company. In that case, you may be able to protect your personal assets in case of a lawsuit.

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 aren't necessarily required to accept returns or refund money, but state laws require the disclosure of such policies.

Learn About Shipping Restrictions

Certain items require special shipping considerations. The U.S. Post Office lists items it cannot ship. Hazardous goods and materials can be shipped, but special handling is required. Further, there are prohibitions about shipping certain items to certain countries.

Data Privacy Issues Affect Online Businesses

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 federal and state governments have passed laws protecting consumers. Of particular concern is the privacy of children. If your online business markets to children, you must know about the Children's Online Privacy Protection Act (COPPA).

Even if you don't sell goods or services internationally, it's possible that your business could be subject to the data collection rules of the General Data Protection Regulation (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 using cookies if there's 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. Before posting your business activities and setting up shop online, contact a local business and commercial attorney for guidance and advice on forming an online business.

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