As you begin planning your online business, it’s crucial to start by finding out what you’ll need to operate legally. There’s a lot of paperwork and permits, so it’s wise to figure out exactly what is required in the earliest stages of your endeavor.
What is a business license?
A business license allows a business owner to legally run a business. Such a license means you are a legitimate enterprise in the eyes of the government. These licenses are also known as business operating licenses and general business licenses.
Business licenses are not ecommerce specific. All businesses, from your favorite dim sum restaurant to an online-only dropshipper, must have a license.
Exactly what you’ll need to obtain a business license varies by state. Start at the local government level to find out exactly what you need for your business needs. Your state’s website will provide more information on what is required.
Expect to renew your business license every few years, but don’t worry–business license fees and renewals are generally low.
Do you always need a business license to sell online?
If you operate an online store as a sole proprietor, you may not need a business license to sell online. However, remaining a sole proprietor rather than forming a business entity such as a limited liability corporation (LLC) or corporation leaves your personal assets vulnerable.
Entrepreneurs going the sole proprietor route can lose their personal assets as they are liable for any bad debts of the business or are defendants in lawsuits. There is no limit to liability.
Helpful resource: Sole Proprietorship vs. LLC (Main Differences)
What if you already have a brick-and-mortar store?
While you do need a business license to sell online, you don’t need an online-specific business license, per se.
If you already have a brick-and-mortar store and a business license, your business license allows you to sell your products and collect the appropriate sales taxes.
In short, if you want to add an online component to your existing physical retail business, no additional paperwork is needed.
Common licenses and permits required to sell online
The U.S. Small Business Administration (SBA) notes that most small businesses will need a combination of licenses and permits from state and federal agencies. The requirements for your specific business depend on the nature of your enterprise, your physical location, and government regulations.
Federal licenses are required for any business activity regulated by a federal agency. While such regulation does not apply to many online businesses, there are outliers. For example, if your business involves the importation or transportation of animals, animal products, biologics, biotechnology, or plants across state lines, you will need a license from the U.S. Department of Agriculture.
You will require state licenses and possibly county and city licenses, based on local laws. Your state’s website should list all requirements.
Typical permits and licensing requirements for online sales include:
Sales tax license or seller’s permit
Along with a business license, you’ll need a sales tax license or sales tax permit. The two go hand in hand if you sell taxable items. A sales tax license is necessary for sales tax collection. Some states refer to this as a seller’s permit or sales and use tax permit. Seller’s permit fees are generally low-cost or free. Upon approval of your application, you receive a state sales tax ID number.
Helpful resource: What is Sales Tax?
Collecting sales taxes is part and parcel of conducting an online business. A sales tax license permits you to collect sales taxes, although sales taxes differ by state. Sales taxes usually focus on tangible items, but some states levy sales taxes on services. States also have sales tax exemptions on certain products, such as food or medicine, but this is not uniform.
Failure to collect and submit sales taxes can result in fines and even jail time in some jurisdictions.
You may have to apply for multiple sales taxes licenses if you sell in multiple states and meet their revenue or transaction number thresholds. Since the revenue amounts and transaction numbers vary, check out state websites regarding what products or business activities necessitate a sales tax license.
Five states do not impose sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Seller’s permits are not needed in these states. The 45 other states and Washington, D.C. do impose sales taxes.
What if you only plan to sell items online for a short time? Check to see whether your state offers a temporary seller’s permit. These permits are usually good for 90 days.
Why do you need to pay taxes in other states?
A tax nexus is a connection between a business and the taxing authority. Without establishing this connection, the local or state taxing authority cannot impose taxes on the business.
In 2018, the U.S. Supreme Court ruled in South Dakota v.Wayfair that states can mandate that businesses without a physical presence in the state–such as an ecommerce business–can collect and remit sales taxes on transactions in the state. There is a threshold of more than 200 transactions or $100,000 in in-state sales before such sales tax collection and remittance applies.
Before this 5-4 ruling, you were only obligated to collect sales taxes where your business was physically located. Now, an online business must collect sales taxes in most states in which it sells products or services.
There is still no common definition of nexus throughout the 50 states, and the regulations and definitions for nexus change frequently. Keep in mind that sales tax is a major source of revenue for most states, so they will pursue any businesses meeting the tax nexus criteria.
States define their own sales tax nexus. For instance, New York requires that businesses without a physical presence in the state are presumed to regularly solicit business if the cumulative total of the gross receipts from tangible personal property sales delivered into the state exceeded $500,000 and more than 100 sales of tangible personal property were delivered in the state over the prior four quarters. In Texas, eligible sales also exceed $500,000 within the previous calendar year, but there is no sale number trigger. In the Lone Star State, local sales tax may come due. Currently, the single local use tax rate is 1.75%.
Tax nexus also depends on where you keep your inventory. If your ecommerce business is based in one state but inventory is stored in other states, the storage of your inventory creates a tax nexus. That may affect the types of licenses and permits you’ll need.
Learn more: Sales Tax Nexus: A Simple Guide
If your online store involves selling used goods, you will need a reseller’s permit. These are also known as resale certificates or tax exemption certificates. While similar to a seller’s permit, it is not synonymous. Not all retailers accept reseller’s permits.
When you purchase goods specifically for resale as a legitimate business, you do not have to pay local tax on them if you have a reseller’s permit. You collect the tax from the customer when the item is sold. You will need a separate reseller’s permit for every seller, unlike the single seller’s permit.
Many resellers use platforms such as eBay or Amazon rather than manage their own stores or ship merchandise.
Professional and occupational licenses
If your profession requires a license and it is related to your online business–such as real estate sales or architecture–a professional license alone is insufficient. You will still need a business license.
The same holds true for certain well-regulated industries, such as insurance or energy.
What if you sell through a third party?
Many online businesses do not sell products from their own websites but use a third-party seller, such as Amazon. Such marketplace facilitators, as they are known, collect and remit sales tax on behalf of their marketplace sellers.
Some states will require marketplace sellers to register and file returns for sales taxes in that state. Check with the state’s website to see whether marketplace sellers must file such returns.
Learn more: Bookkeeping for Amazon Sellers
How to apply for an online business license
Some licenses for an online store allow you to submit information online, while others rely on snail mail. There are even those for which a personal appearance is needed. Keep in mind that licenses vary according to the type of business, where you are located, and other factors.
Before applying for an online business license, get the necessary paperwork in order. Such paperwork includes:
Employer Identification Number (EIN). Getting an EIN from the IRS is one of the first steps when starting a business. It is also known as a federal tax identification number. Note: A sole proprietorship without employees does not need an EIN. They can use their Social Security numbers, but to avoid identity theft, an EIN is preferable.
Legal entity formation. This is the business structure, such as LLC, partnership, or corporation. The actual filing can be done online, with fees paid to the Secretary of State.
Doing Business As (DBA) license. Known in some states as an alternative or trade name license, a DBA license allows you to conduct business using something other than your own name. The payment gateway for your online debit and credit card processing should use this name, so customers are not confused when billed.
Home occupation permit. Not every home business requires this permit, but your municipality or county may mandate it. That is usually the case if there are employees, regular shipping from the residence, business signage, or customers coming to the home. Without a permit, complaints from neighbors could shut you down, or you could receive an unwelcome visit from your local zoning officer.
Expect to pay fees for obtaining these permits. The amounts vary according to the locale and type of license or permit.
How long will it take to get your business license?
Once you file your application and pay your fees, you should receive your business license within a few weeks. In many cases, the timeframe is shorter, and the license arrives in a matter of days. Again, much depends on your location.
The benefits of getting your business license
Besides legitimacy, there are other benefits to getting your business license. You can open a business bank account, for one, and once you have a license, you can claim ecommerce-specific business tax credits and tax deductions.
Depending upon the nature of your ecommerce business, these may include:
- Home office deduction
- Business internet and cell phone use
- Business insurance
- Shipping costs
- Office supplies and packaging
- Online services, such as Bench
- Website domain and hosting
- Business meals and entertainment
Learn more: The Big List of Small Business Tax Deductions
How Bench can help
Bench is the largest professional bookkeeping service in America for small businesses. We can handle your bookkeeping and tax filing for you while you focus on starting and running your new venture.
Even when you’re pre-revenue, it’s essential to have solid bookkeeping in place. It can help you keep track of expenses and develop a familiarity with your finances you’ll need when approaching a bank or lender. It saves a lot of time in the long run!
If you’re an ecommerce entrepreneur, even better—Bench is especially well-suited to online businesses. We automatically import your bank statements and transaction records from payment services like PayPal. If you’re already operating a paper-free business—with all your financials online—then Bench integrates seamlessly.
Plus, when your financial records are in order, you’re better able to anticipate the future and make smart business moves. Having tidy books for tax purposes is especially important. The more organized you are, the faster it is to file, and the easier it is to take advantage of tax deductions. Learn more.
You have your business license—what’s next?
Your new business dream is coming ever closer to reality. What are the next steps to take after receiving your business license?
This is the time to line up financing, as lenders may not consider providing loans to businesses lacking licensure. If you have not already consulted a business attorney, consider doing so now. Your lawyer can advise you on trademarks, taxes, tech compliance, protecting consumer security, and the various legal issues involved with a new enterprise. Just don’t get too far ahead of yourself and forget to draft up a business plan for your ecommerce shop.
And who knows? In 1994, Jeff Bezos started an online business selling books. Amazon has grown a bit since then, but once upon a time, it was a small business startup.