Online businesses have grown in popularity in recent years. For most people, the attraction is the ability to cut costs and run a business from almost anywhere.
However, you must plan carefully before starting an online business. As with physical businesses, you will need a marketing strategy and logistics plan.
You’ll also need to think carefully about your legal obligations, which many online entrepreneurs overlook. We’ve outlined a few of the most important ones below.
Article Shortcuts:
- Choosing the Right Business Structure
- Permits and Licenses
- Tax Compliance
- Data Privacy
- Shipping Regulations
- FAQs
1. Choosing the Right Business Structure
Registering your business formally is arguably the most important legal step you need to take.
As Chris Aubeeluck, Head of Sales and Marketing at Osbornes Law, explains, “Even if your business operates solely online, you’ll still need to register it formally. There are several legal structures to choose from, and your choice will determine important details like how you're taxed, the amount of liability you can bear for losses, and how you can raise capital.”
A sole proprietorship might be ideal if you’re planning a small operation with only yourself as the owner.
Sole proprietorships are a simple business structure that allows individuals to run businesses with relatively little complexity. From a legal perspective, you and your business are the same.
One significant advantage is that sole proprietorships enjoy pass-through taxation, meaning the business does not incur tax.
Conversely, the major disadvantage of being a sole proprietor is that the business owner is unlimitedly liable for any losses.
Other business structures include Limited Liability Companies (LLCs) and Corporations. Your business situation and goals will determine the structure of your online store. For detailed guidance, you can also consult a lawyer.
2. Permits and Licenses
Some businesses require specific licenses and permits.
For example, if you aim to sell food, alcohol, tobacco, firearms, or other highly regulated items like pharmaceuticals, you must fulfill several licensing requirements.
These requirements may differ depending on your state. To be sure, check with your state and local authorities for specific requirements or consult a lawyer.
3. Tax Compliance
Grant Aldrich, Founder of Online Degree, advises, “Taxes are a non-negotiable part of running any business. You'll need to understand the federal, state, and possibly local tax obligations, including income and sales taxes. In addition, online businesses may need to collect and remit sales tax in multiple states depending on how much intrastate sales they make.”
The Supreme Court's ruling in South Dakota v. Wayfair established an essential principle regarding intrastate taxes. In this landmark case, the Court held that sellers do not need a physical presence in a particular state to collect and pay sales taxes to that state.
Instead, you might have to collect and remit sales tax in states where your business has an "economic nexus," even if you don't have a physical presence there.
Each state sets its own rules for what constitutes an economic nexus, which typically involves a certain amount of sales revenue or transactions within the state.
For more information on tax and accounting for eCommerce businesses, be sure to speak with a tax professional.
4. Data Privacy
Data privacy is a primary concern for online businesses. In most cases, you will collect and store your customers' financial data and other forms of data, such as those collected by cookies.
This data may be stored locally but is often stored using a third-party cloud communications provider.
It may be surprising to learn that the US does not have a comprehensive data protection framework, but this is true. Numerous Federal laws apply to limited areas like financial data or health privacy.
However, there are no federal laws that would apply directly to data collection, storage, and processing by online businesses. This leaves it up to states to fill the gap, and a few, like California, have stepped up.
Data privacy concerns and protection frameworks are increasing worldwide, which is certainly true of the US. However, no overarching federal law exists to provide a data protection framework. This means you must turn to state legislation to learn your data protection obligations.
The California Consumer Privacy Act (CCPA) and similar laws in other states, such as Virginia, require online businesses to be transparent about collecting, using, and storing customer data.
If you want to grow your business globally, you must also consider the General Data Protection Regulation, which applies to the European Union. In general, to meet data privacy regulations, you'll need:
- A clear privacy policy on your website
- A way for users to provide or withhold consent for data collection, storage, and processing
- A way for customers to request that their data be deleted
5. Shipping Regulations
There are quite a few laws and regulations that concern shipping. These laws can be extensive and sometimes complicated, leading many online businesses to outsource their shipping needs.
Roman Zrazhevskiy, Founder & CEO at MIRA Safety, shares that “Online businesses typically handle shipping either directly or through third-party partners. Using third-party partners can be a great way not only to outsource the hassle of dealing with logistics but also to insulate yourself and your business from liability when things go wrong.”
If you decide to handle shipping yourself, you must become familiar with several regulations and regulators.
Key areas and agencies:
- Hazardous materials (HAZMAT): The Department of Transportation (DOT) regulates the transportation of hazardous materials, and it has strict requirements for packaging, labeling, and shipping documentation.
- Food and Drug Administration (FDA): The FDA regulates the shipment of food, drugs, cosmetics, and other products to ensure their safety and proper labeling.
- Customs and Border Protection (CBP): The CBP oversees the import and export of goods and enforces customs laws and regulations.
- Packaging and labeling: Regulations dictate how packages must be labeled with information such as the contents, weight, and origin.
FAQs
1. What to do when starting a business online?
Like any other business, you’ll need to carefully plan your business structure, marketing strategy, logistics, and legal considerations, including registration, tax compliance, and data privacy policies.
2. What are the legal requirements for starting a business?
Register your business, comply with tax laws, and secure any necessary licenses or permits, especially for strictly regulated products like food, alcohol, or firearms. Other laws and regulations may also apply depending on your industry.
3. Do you need a license for an online business?
Depending on your products or services, you may need a license. Specific licenses are usually required for regulated goods like pharmaceuticals or alcohol. Check with local authorities or consult a legal professional for more details.
4. Are there any online business laws and regulations?
Online businesses must adhere to numerous laws on things like tax compliance, data privacy (e.g., CCPA), shipping regulations, and more. These vary by state and country.
5. What are eCommerce laws and regulations?
eCommerce laws are laws that apply to online businesses. They typically cover areas such as tax collection, data protection, shipping requirements, and compliance with regional laws like GDPR in the EU or state laws in the US.
Final Word
Starting an online business can be rewarding if you do it right. As with any other business, there’s a lot you’ll need to think about, but be sure you don’t make the mistake of overlooking your legal obligations.
To ensure you stay protected, be sure to consult a lawyer for formal legal advice. And if you haven’t yet started your online business and would like some ideas, here’s a helpful guide to some eCommerce ideas.
Author Bio
David Abraham is a tech lawyer. He has extensive experience in artificial intelligence, financial technology, human rights law, and digital marketing.