What makes a seller a business?
Just because you make money selling your old comic book collection or a trunk full of vintage clothes online, that does not necessarily mean you run your own business. However, there is no exact line for when several online sales turn into a business. Most apps, websites, or platforms that enable private sales and take a percentage, however, will also provide some basic guidelines for sellers. Some will even issue tax forms, or provide other limited services or guidance to help.
The IRS gives a list of questions to help you identify whether you might be running a business:
- Do you treat the activity like a business, such as by keeping financial records?
- Do you need the income from the activity to pay for living expenses?
- Do you expect to make a profit from the activity within a few years?
- Have you made a profit from this type of activity in the past?
If you answer yes to any of the above questions, you may be running a business. Even if you've been selling online for years without considering it a business, you may want to draw up a Business Plan and chat with a lawyer. Whether the activity is a hobby, a few private sales per year, or a business, you are still required to report income you earn to the IRS. The difference between these types of activities depends on whether the IRS calls the money you earn other income or self-employment income. Self-employment income has a higher tax rate.
What are the requirements for online retail businesses?
The specific laws about running a business vary from state to state, but many requirements are similar, and some might cross state borders.
Starting a business
The easiest way to figure out what legal requirements must be met to start your business is to ask a lawyer. Depending on where the business is located, you might need some or all of these things, or more, to start a business:
- Business license: Some states require anyone who is doing business activities to get a business license. The county or local clerk's office in your area probably issues these, and they are fairly inexpensive.
- Doing business as (DBA) license: A DBA lets you do business using a different name, even if you do not set up a formal business entity.
- Employer Identification Number (EIN): An EIN is a unique identifier for your business. The IRS issues EINs for tax purposes, but they have other uses as well. Most banks, for example, require an EIN if you want to open a business account. Without an EIN, you might have to open a personal account using your own name and Social Security number.
- Seller's license: Your area might require you to have a seller's license or permit. Even if you need a business operation license to run any kind of business, you may also need a seller's license if you sell goods.
- Home occupancy permit: If you run your online sales business out of your home, you may need a home occupancy or home occupation permit. This way, you can run a business from home without breaking zoning laws in your city or county.
- Sales tax license: Nearly every state and county in the country requires sellers to collect and pay sales tax. If the app or platform you use does not automatically collect sales tax, you may need to collect sales tax yourself. Some states require a sales tax license to do so. Other states can also require sales tax on online sales when out-of-state sellers ship to customers in those states. If you do a lot of business in other states and the platform you use does not take care of taxes, you should find out whether you need to meet sales tax requirements.
Running a business
Once you have set up your business, such as by getting the required licenses, you might need some of these to run it:
- Contracts and sales documents: Platforms have rules for sales between buyers and sellers, but you might want to have some documents of your own. For example, including a Bill of Sale with every item you ship gives you and the customer a record of the order. A Bill of Sale can help prevent negative online reviews by providing customers with another way to reach you to resolve potential problems.
- Online Terms and Conditions: Setting out your Online Terms and Conditions is often very important. Many consumers may actually read these to understand your policies, particularly for shipping, returns, exchanges, and refunds.
- Intellectual property protection: Trademark law usually protects brand names, slogans, logos, and other designs that identify your business or your product. You can register a trademark with your state or with the federal Trademark Office. Copyright law can also help protect other creations you might use in your business, such as website content, designs, menus, and more.
- Legal and tax help: It may be worthwhile to seek legal advice to make sure you are following the laws that could affect your bottom line. Also, when tax time comes around, paying for professional tax help can often save you money.
What is the difference between being self-employed and running a small business?
The main differences between being self-employed and running a small business involve how you pay yourself, how you pay taxes, and how you keep records.
A self-employed person might have a DBA, or they might do business under their real name as a sole proprietor. They typically pay self-employment tax and report their business income and losses on a Schedule C attached to their personal income tax return. Businesses, such as corporations, file a different type of tax return separate from the business owner and keep separate financial records. Another important difference is that a corporation or LLC protects the business owner from being responsible for business debts.
If you want to switch from being a sole proprietor to a corporation or LLC, the process is usually fairly simple with the right guidance.
When do I need to register my business?
Not all businesses need to register. It depends on the size of your business, the kind of activities you are doing, and the laws in your area. If you are unsure, do not hesitate to ask a lawyer.
Often, small business owners wait until they are generating enough revenue or profit to pay the costs of registering. If you are required to register, however, waiting can lead to late fees, penalties, or fines. You typically need to register and get any required business licenses before doing the kinds of business activities included in most Business Plans.
To learn more about starting or running your own eCommerce business, reach out to a Rocket Lawyer network attorney for affordable legal help.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.