I've owned and worked in few small businesses over the last 30 years and continue to enjoy learning about business and marketing topics.
Does a home-based or online business need to follow any of the laws that a “normal” business would follow?
Yes, it does! Home-based and online businesses must follow many of the same requirements that regulate brick-and-mortar businesses. The steps required depends upon where you live, what exact business you are running, and how you choose to structure your business. Here are six important questions to answer while setting up your eBay, Amazon or other online business.
1. Sole Proprietor, Corporation, or LLC?
First you'll need to decide which type of business structure you'll use. The structure you set up—sole proprietor, corporation, LLC—will affect your taxes, liability and possibly various insurance options. That's why it's important to get some of these ducks in a row before you open the doors of your web-based business.
A sole proprietor is the quickest, easiest and least expensive business entity to set up, but that doesn't make it the best choice for you. Corporations and Limited Liability Companies (LLC's) have paperwork to maintain, annual reports and fees to pay to your state, as well as special federal income tax forms to be filed. However, there could be legal and income tax advantages to setting up as a corporation or LLC.
It's easy start out as a sole proprietor and you can incorporate at any time. On the other hand, it's not as easy to change from a corporation or LLC back to a sole proprietor. Consider whether you're willing to maintain the required records for a corporate entity, as well as whether you will have the money to pay the annual filing fees.
There are many books available on the subject, but every situation is unique and you might not fully understand the benefits in your situation just from reading a book. Consider consulting with a tax accountant and an attorney who specialize in working with small businesses. A consultation now could save a lot of money in the long run!
2. Do I Need a Business License in My State?
The terms "occupational license" or "business license" can be used interchangeably, but some states use one or the other exclusively. Your business structure may determine whether your state, county, or municipality require a business license.
I recommend starting at the state level using this link from the Small Business Administration. The Small Business Administration (SBA) provides links to each state and the specific information for that state. Then you can work your way down to the county level and finally the municipality.
Carefully confirm that you're on the official government website before submitting business information or fees. Beware of websites designed to mimic an official site in order to charge you money for something you can get for free from a governmental agency!
3. Have You Claimed Your Name?
Most states require you to register if you plan to do business under a name other than your personal legal name. This name may be referred to as a "DBA" (doing business as), a "fictitious name," or a "trade name." Be sure to check with your state to understand their requirements.
It's usually necessary to post a legal notice in a local newspaper before you can register a fictitious name with your state. Look for one that specialize in posting legal notices and has lower advertising rates than the regular newspaper. Some of them will also send a copy of the published notice directly to the state regulating agency.
If you set up as a corporation or LLC, it isn't necessary to register your business name as a fictitious name/DBA. The paperwork filed for the LLC with the state will provide the details of who owns your business and what your business does.
4. Where Can I Find Information About My County and Municipality?
Your next stop should be at your county's website. Do they require a home-based business to be licensed? Do a quick web search to find information for the county in which you'll be doing business. For example, I did an internet search for "Pinellas County business registration for online business," and up came the link to the official website. This led me to the page explaining that no occupational license is required for businesses within unincorporated Pinellas County and reminding me to check my city's requirements.
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Which brings us to our last expedition: check with your municipality. Each city has different requirements for a business license, also referred to as a business tax receipt. If your municipality doesn't post the information online, you'll need to call the the city office.
Make sure that you're visiting the official site websites of these public entities and not a site that will try to sell you the information for a marked up price, or offer to "set up your business for a small fee." The legitimate sites could be .gov, .org, or even .com. Look for words like "official site of..." or images of the official seal, and examine the site very carefully before you take out your credit card to pay for anything.
5. Do You Need a Business Checking Account?
A sole proprietor (depending on state regulations) can get away with a personal checking account as long as you don't co-mingle your funds. Some states will require you to set up a bank account for your company. This is a good idea even if it is not required by the state as it will allow you to track and manage your business finances much more easily.
Be sure to use your business account exclusively for business expenses and income. Avoid "commingling" your personal and business finances. You may write yourself a check—pay yourself—from your business account, but don't pay directly for personal expenses from it.
Shop around for your business checking account, as unfortunately those usually aren't free. Online businesses generally don't have cash coming in, so it's not necessary to have a local bank. This allows you to expand your search to some of the well-established internet-only banks. Also, be sure to check with any credit unions of which you're a member.
6. What Do You Mean, Sales Tax???
Most states want sales tax paid for online sales, so be prepared to deal with this if you sell via eBay, Amazon, or a business website. Sales tax regulations vary from state to state. It's a complicated issue that's tricky to understand in the beginning. At the very least, you'll be collecting sales tax for sales within your own state, you may need to collect sales tax for items delivered to other states, too.
First, you'll need to check with your state's department of revenue to learn their regulations regarding "sales and use tax." Once you register with your state to collect sales tax, you'll receive a certificate that allows your business to purchase items intended for resale without paying sales tax. This tax certificate is also required by wholesale vendors when you set up accounts. Along with those perks comes the responsibility to collect sales tax and send it on to the state each month or quarter.
For information about possible sales tax liability in other states, I recommend the "Getting Started Guides" posted by TaxJar. TaxJar has been a leader in providing online sellers with the tools and information necessary for sales tax compliance. Their guides are available without any membership or registration required. Start with "Getting Started Guide for Online Sellers" and "When to Register for a Sales Tax Permit."
Businesses shouldn’t register to collect sales tax in states where they don’t need to register, or register too early in any given state. Both of those mistakes could result in unnecessary costs and time spent on sales tax compliance.
Your 6 Quick Steps Review
1. Choose business structure
2. Register with state
3. Register with county & city
4. Purchase domain name
5. Open a business checking account
6. Register to collect state sales & use tax
Already Started? It's Not Too Late!
If you've already started selling on eBay or Amazon without setting up your business the best way for your purposes, don't freak out! It's okay, you can make changes to best suit what you want to accomplish or do what it takes to "make your biz legal." Just take it one step at a time and you'll have a firm foundation to continue your growth and success as an online business!
Are You Ready?
The Fine Print Disclaimer
This article is intended to be a brief overview and not an in-depth analysis. I am not an attorney or tax professional and do not intend to convey any legal or tax advice in this article. It is highly recommend that you do additional research and consult with legal and tax professionals before setting up your online or home-based business.
Sources for Article
StateOfFlorida.com - A commercial website with well organized information. This is NOT the official State of Florida site.
MyFlorida - The official state of Florida website.
The US Small Business Administration - Super resource for small businesses.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2012 Amanda Rose