6 Legal Considerations for Starting an Online Business

by Leigh Morgan
Portrait of young smiling cheerful entrepreneur in casual office making phone call while working with laptop

Whether you want to sell digital products or start your own drop-shipping business, it's important to follow the law. You have to pay taxes, comply with local regulations and operate your business in an ethical manner.

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Read This Before You Start an Online Business

Before you review the specific steps involved in starting an online business, it's important to understand the general requirements imposed on business owners. Typically, you must follow local, state and federal laws.

For example, federal law requires you to file a tax return if you net more than a certain amount of money during the year. Unless you live in one of the nine states with no income tax, you also have to file a state tax return. Some municipalities even collect local income taxes. Before you launch your business, meet with an attorney to discuss relevant online business legal requirements.

If you plan to hire employees, you may also have to follow laws related to workplace safety, employment discrimination and disability accommodations. Consult a licensed attorney for more information on your legal obligations.

6 Legal Steps to Starting an Online Business

If you're ready to start your online business, follow these steps.

1. Choose a Business Structure

The first step is to choose a business structure, such as a sole proprietorship, limited liability company (LLC), partnership or corporation. Each type of business has advantages and disadvantages.

For example, the sole proprietorship is the simplest structure to use, but it's also somewhat risky. If you're a sole proprietor, you're liable for your company's debts. Should a customer sue you and win, you may need to sell your home or other assets to pay the judgment. LLCs and corporations come with limited liability, but they're also more complex and more expensive to start.

2. Acquire Tax IDs

Next, you need to acquire the appropriate tax IDs. To apply for a federal employer identification number, simply visit the Internal Revenue Service website and fill out the online form. You can use the online service as long as your business is within the United States or one of its territories.

To apply for a state tax ID, contact your state's revenue agency for instructions. The process differs from state to state, but you generally need to provide some basic information about your business, such as its official name and where it's located.

3. Protect Your Intellectual Property

The term intellectual property refers to creative works that come from your mind. Product designs, songs, movies and inventions are all examples of intellectual property. Once you develop a piece of IP, you need to protect it or else someone could start using your idea. Consult with an attorney to determine if you need a patent, trademark or copyright before you launch your business.

4. Obtain Required Licenses and Permits

Many municipalities require a business permit for online business, even if you plan to operate out of your home office and hire no employees. Before you start selling products or services, check with local officials to determine if you need a permit.

In some states, you also need a license to participate in certain types of business. For example, if you want to sell baked goods, you may need a food manufacturer's license. Contact your local licensing department for more information on the online business laws applicable in your neighborhood.

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5. Understand Local Restrictions

Before you invest in a business, make sure you understand the local rules and regulations. In some places, it's illegal to operate a business out of your home unless you obtain a permit. You may even need to request a zoning variance. A local attorney can walk you through the process and make sure you're in compliance with the law.

Some municipalities even have shipping restrictions you must follow if you want to avoid fines and other penalties. Depending on what type of product you sell, you may have to use certain labels or take special precautions when packing items and shipping them to other states.

6. Create a Compliant Website

Several laws govern how businesses can use the personal information provided by customers. For example, the Children's Online Privacy Protection Rule requires business owners to follow certain rules if they operate websites with products or services aimed at children under the age of 13.

Creating a compliant website is one of the most important legal steps to starting an online business. Here are some of the other online business legal requirements you need to know about:

  • Americans With Disabilities Act: Every customer deserves equal access to your website, so it's important to consider ADA compliance when setting up an online business. Your company's website should be easy to navigate and provide accommodations for users with hearing and vision problems.
  • General Data Protection Regulation: If you intend to collect personal data from citizens of the European Union, you'll have to comply with the GDPR. The law governs how personal information is collected, used and transferred.
  • CAN-SPAM Act: Under the CAN-SPAM Act, you must give people a way to stop receiving messages from your company. The law also establishes rules for sending commercial messages to email users in the U.S.

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