Starting your own e-commerce business can be a little bit tricky. You have to think about a lot of things such as your inventory, marketing your business, servicing your customers, and others. But before you get busy with running your business, the first thing you need to do is register your e-commerce business. Running an online business doesn’t exempt you from complying with the requirements for an offline business.
In order to operate your ecommerce business legally, you need to have your business registered. All businesses are required to have a license even if they are online. Operating a business without the necessary license can subject you to heavy fines. Before getting started, ensuring that your business is complying with regulations should be your top priority. This article will guide you on the basic steps to register your ecommerce business.
US retail ecommerce sales are expected to surpass 735 billion by 2023 which is an increase from the $504.6 billion in 2018. In the US, apparel and retail sales alone is expected to reach $138.7 billion by 2022. With these statistics, there is no perfect time to start an ecommerce business other than now.
When getting started with an e-commerce business, the first thing you need to do is register it. You need to be aware of the different licenses required to legally operate your business. Even if your business is conducted online, you also need to make sure that you stay compliant. Here are some of the permits and licenses you need to make your business operations legal.
1. Choose your business structure
Before registering your business, you should first choose the kind of business structure. Choose the structure carefully. Although you could switch to a different business structure in the future, there might be restrictions based on your location. It is best to consult your lawyer or accountant.
Sole proprietorship is the most popular business structure because it is the easiest to set-up. As the name implies, you as the sole proprietor operate the business on your own. It requires less effort when doing reports as you have all the power to make all financial decisions related to the operations of your business.
Sole proprietors have the free will to file all tax returns using your personal tax filing information. The advantage of sole proprietorship is that it is not a legal entity. The business name is not separate from the owner. There are no legal restrictions in the operations of the business.
One drawback is that sole proprietorship is subject to debts and liabilities that you might incur the course of managing its operations. If the business defaults with debt payment, your creditors can file a bankruptcy petition against you. Your assets could be seized to satisfy a business debt or legal claim against you.
In a sole proprietorship, the expenses and your income from the business are included on your personal income tax return (Form 1040). Profits and losses are recorded on a form called Schedule C, filed together with the 1040. The “bottom-line amount” from Schedule C is then transferred to your personal tax return. Whatever losses you will incur can be offset from the income you will earn from other sources.
Aside from the annual self-employment taxes, you need to make estimated tax payments if you expect to owe at least $1,000 in Federal taxes for the year after deducting withholdings and credits and your withholding will be less than the smaller of: 1) 90 percent of the tax to be shown on your current year tax return or 2) 100 percent of your previous year’s tax liability.
The Federal government allows payment of estimated taxes in four equal amounts throughout the year on the 15th of April, June, September, and January. As a sole proprietor, your business earnings will only be taxed once.
If you will have someone else assist you in operating your e-commerce business, you could consider structuring your business as a partnership. There are two types of partnership namely limited partnership (LP) and limited liability partnership (LLP).
In limited liability, there is only one general partner with unlimited liability, all other partners limited liability. The partners with limited liability also have limited control over the company which is documented in a partnership agreement. Profits are passed through to personal tax returns, and the general partner without limited liability must pay self-employment taxes.
In limited liability partnership, on the other hand, each owner of the business has limited liability. Each partner is protected from debts against the partnership and has no responsibility over the actions of other partners.
Limited Liability Company (LLC)
In a limited liability company, you enjoy the benefits of both the corporation and partnership. In most instances, your personal assets are protected from personal liability and not subject to risk in case your LLC faces bankruptcy or lawsuits.
Profits and losses can get passed through to your personal income without facing corporate taxes. Members of an LLC are considered self-employed and are subject to paying self-employment tax contributions towards Medicare and Social Security
In many states, LLCs can have a limited life. When a member joins or leaves an LLC, some states may require the LLC to be dissolved and re-formed with new membership—unless there’s already an agreement within the LLC for buying, selling, and transferring ownership.
LLCs are a good option for medium or high-risk businesses, owners with significant personal assets they want to be protected and owners who want to pay a lower tax rate than they would with a corporation.
A corporation is a legal entity that is independent from its owners. This type of business structure can make a profit, be taxed, and can be held legally liable. Corporations have the strongest protection to its owners from personal liability but the cost to form a corporation is higher than other types of businesses.
Unlike sole proprietorship, partnerships, and LLCs, corporations pay income tax on their profits. There are cases when corporate profits are taxed twice. First, when the company makes a profit, and the second when dividends are paid to shareholders on their personal tax returns.
Corporations also have the advantage when it comes to raising capital because they can easily raise funds by selling stocks. Corporations can be a good choice for medium or higher-risk businesses, those that need to raise money, and plan to “go public” or eventually be sold.
S corporations are designed to avoid the double taxation of regular corporations. They allow profits and some losses to be passed through directly to owners’ personal income without the risk of corporate tax rates.
Not all states tax S Corps in the same way. However, they are recognized in the same way the Federal government does and taxes the shareholders accordingly. In some states, S Corps are taxed on profits above a specified limit. Other states simply treat S Corps as a regular corporation.
S Corps are not allowed to have more than 100 shareholders and each of the stockholders must be U.S. citizens. Similarly, they need to follow strict filing and operational processes of the C corp.
A benefit corporation is a for-profit corporation recognized by most US states. They are different from C corps in terms of purpose, accountability, and transparency but similar in taxation. They are driven by both mission and profit.
In a B Corp, shareholders are accountable in producing some kind of public benefit aside from financial profits. In some states, B corporations are required to submit annual benefit reports that show their contribution to the public good.
Close corporations are like B corporations but with a less traditional corporate structure. Rules for close corporations vary but shares are usually barred from public trading. They can be run by a small group of shareholders without a Board of Directors.
Nonprofits are set-up to do charity, education, religious, literary, or scientific work. They can be granted with tax-exempt status hence they are not subjected to state or Federal income taxes on any profit it makes. However, they need to file with the IRS in order to be tax exempt.
Nonprofits are required to follow similar organizational rules followed by a regular C corp. Nonprofits are often called 501(c) (3) corporations because they are tax-exempt.
2. Get Your Employer Identification Number (EIN)
The EIN is a Federal tax ID number issued by the IRS that proves that your business is a distinct tax entity and ensures that your business collects payroll tax and is compliant. Although it is not technically considered a license, it is a very good idea to file an EIN. It will free your company from tax-related hassles. If you are planning to hire employees, incorporate as an LLC or corporation, or plan a business bank account, an EIN number will come in handy.
3. Secure basic permits and business licenses
Even e-commerce businesses will need a business permit to operate legally. Having a license will allow you to operate in your city, county, or state. The rules for getting licensed varies from one state to another so do check it with your city hall or state website. The requirements for licensing are fairly easy and the fees are minimal. Check if you need to renew your license. Operating with an expired license can result in fees or fines.
Home Occupation Permit
If you operate your e-commerce business from home, a home occupation permit is a necessity. Having a home occupation permit ensures that your neighborhood is zoned for home business activity, which means that you are not adding unnecessary traffic or noise to your community.
Before issuing a license, the state or city agency may conduct a zoning review of your business location or require a zoning permit. The good news is that it is unlikely that your ecommerce business will not face many issues with zoning. However, zoning laws may restrict some of the following:
- Physical changes to the home’s appearance
- Number of visitors and/or employees
- Nuisance such as noise or odor
If you are selling goods or services online, you will need a license or permit. Most states require a seller’s permit. However, the details will vary by state so check with your own state’s department of revenue or licensing offices to ensure that you get the necessary permit.
Sales tax license
If you are selling taxable products and services in your home-based business, you are required to pay sales tax on the items you sell. For that, you will need a sales tax license along with a certificate of resale, but it’s important to note that sales tax differs from state to state. You will need to check with the state and locality that you operate in to make sure that you are following set rules properly and collecting state sales tax.
Not every online business will need an occupational permit. Whether your ecommerce business needs a license is dependent on the type of industry you’re in and the type of work you do. An occupational license will help you establish credibility. Check with your business licensing office so you know what kind of work is required to file for to remain as a professional in your given trade.
Online businesses are at risk of being targeted for data theft. For this reason, you need to make sure that your ecommerce business is PCI compliant. It means that you will not only provide secure and encrypted checkout experience but also storing purchasing information on paper or via recording. PCI compliance is a necessary protection for online sellers.
When setting up an ecommerce business, it’s essential to comply with the Children’s Online Privacy Protection Act (COPPA). Under the Act, you are not allowed to get personal information from a child under the age of 13. If your e-commerce business is selling a product or service to a young audience, you’ll need to comply with COPPA regulations
Why airisX E-commerce?
airisX works as an multi-platform, omni-channel, solution provider, covering: Amazon, Shopify, eBay, Walmart, Jet, Overstock, and many more. If you run your own web store, we can help there too. With deep industry experience, our team lives cross-border logistics and supply chains, marketplace platforms, revenue growth strategies (through a combination of branding, marketing, advertising, social and more), contract manufacturing, and sourcing.
Being successful in the Ecommerce space is more than just listing some products and hoping the sellers arrive. airisX solutions brings together a comprehensive suite of services to cover all aspects of operating and growing an Ecommerce business. Successfully helping clients meet their goals requires having in-depth knowledge and experience in the Ecommerce category in which they operate. This allows clients to achieve more, faster, and with less resources so you can transform your business for the future.