You’ve got a great idea for an ecommerce business. You’ve already done your research, scoped out domain names and now you’re ready to start moving forward. But if you haven’t run an online business before, you want to be careful you don’t overlook any of the legal requirements involved in getting a new business up and running.
Skipping a legal step in the early days of building your business can cost you big down the line and even potentially put you out of business. To help you cover all your legal bases and avoid that fate, we asked a number of lawyers and business owners about what steps are most important to take when starting a new ecommerce business.
1. Register your trademark.
The most common answer we got from the experts was to make sure you do an official trademark search to ensure the business name you choose is legally available, and then register your trademark.
Skipping this step is all too common and the consequences are costly. “I deal with businesses having to go through a re-brand at least once a week due to not running an official search,” explains business lawyer Andrea Sager.
“A google search is not sufficient. Trademark infringement does not only occur when someone uses the same name as another business. It can also occur when consumer confusion is present. Spending a few hundred dollars upfront can save a new business hours of headache and thousands of dollars due to having to re-brand.”
And if you plan to sell internationally – Paperlust co-founder, James Boston – urges you to register your trademark in the other countries you plan to do business in as well. “One of the most important steps that we almost overlooked was the registration of our trademark in jurisdictions outside of our home country Australia,” he said.
“Our IP lawyers very quickly pointed out that if our product was to be as successful in the USA, UK and EU as it was in Australia, we may run into trouble registering the trademark if an opportunist was first to file.”
It costs money now, but taking the proper steps to choose a name you can stick with – and register it everywhere you plan to do business – will save you a lot of headaches down the line.
2. Create your business entity.
“Decide on your business structure with input from a tax specialist,” recommends Envato General Counsel Sarah Davoren. “It’s so much cleaner (and cheaper) to get the structure right at the outset!”
For most ecommerce businesses, getting set up as an LLC or corporation makes the most sense. You can do some initial research on your own, but hiring a professional will pay off in ensuring you choose the right business structure and take the particular actions you need to register your new business accordingly.
3. Check if you need a business license.
“You want to check if you need a business license where you live and get one if needed,” says Ruth Carter, Esq.
The legal requirements for starting a new business are different depending on where you live, so you’ll need to do some research into your local requirements at the city, county and state level. If you’re not sure where to start, a local attorney can quickly bring you up to speed on everything you’ll need.
And don’t think that selling online without a physical location for your business lets you off the hook for this. You’re better off finding out for sure what the requirements are in your area than making assumptions and hoping for the best.
4. Register for “safe harbor” protection.
“It is important that a new ecommerce business register for 'safe harbor' protection that is granted by Section 512 of the Digital Millennium Copyright Act and/or Section 230 of the Communications Decency Act,” says David Reischer, Attorney and CEO of LegalAdvice.com.
This is the law that protects your ecommerce business if one of your website users posts content that neither you or they have the copyright for.
“The liability of an ecommerce website for content that is posted by third parties is not limited to defamation. Rather, the publication of copyrighted materials without the publisher’s permission could leave the business liable for copyright infringement,” Reischer explains.
Luckily, this step is easy. Reischer says registering your new business for safe harbor protection only involves a “simple submission of an application...on the U.S. Copyright website.”
Taking a quick and easy step now can protect you from facing legal liability later due to factors you can’t control.
5. Develop your consumer-facing legal materials.
You know all those long, complicated text boxes full of legalese that you check the box to agree to when you use a website? You need those for your ecommerce business.
“Don’t play Mad Libs by copying and pasting from other websites,” he urges. That could create vulnerabilities you don’t know how to recognize and end up getting you into hot water. Hire someone who knows the ropes to make sure you do this part right.
“Not a day goes by that we don't hear about another data breach,” says Wieser.
“Privacy policies are crucially important to shield e-commerce website owners from legal liability for data breached. Privacy policies include how data is handled, secured and used,” explains Wieser.
7. Charge for taxes (and set the money aside).
You already know that paying taxes is a normal part of life, but make sure you factor it in as a part of doing business as well.
“One of the steps a newbie owner can't skip is setting aside money for taxes. Failing to do so will cost a high tax bill around tax time,” Jaquetta Turner of Young and Finance advises.
That includes both the taxes you have to pay on your earnings and the sales tax you owe on each sale you make (unless you pass the cost along to your customers).
Talk to an accountant early on to learn exactly how much tax you need to charge your customers to comply with the law, and how much of your profits you need to set aside to be prepared for tax time.
8. Obtain an FEIN.
This important bit of advice comes from Bonnie Yamani of Yamani Law. “Obtain a Federal Employee Identification Number (FEIN) from the IRS.”
This is a requirement for every business entity in the U.S., so if you register your business as a partnership, LLC or corporation – anything but a sole proprietorship – it’s not a step you can skip. Getting an EIN for your business is fairly simple. All you need to do is fill out the application online.
And be aware that the application process is entirely free — the IRS warns business owners to avoid any website that requires a fee to obtain an FEIN.
9. Open a business bank account.
Another tip from Yamani is to “open a business bank account and keep all business funds separate from personal.” There are a few reasons to do this:
- For incorporated businesses, a business bank account is a legal requirement.
- Keeping your personal and business finances separate makes it much easier to track your business earnings and expenses, making tax time easier.
- Drawing a distinct line between your business and personal assets reduces your personal risk and liability if your business faces legal trouble.
- It’s a clear sign to the IRS that your ecommerce store is a business, rather than a hobby. If you report business losses and deductions and they determine it’s the latter, you risk an audit.
If you’re serious about your business, talk to your bank about opening an account that’s specifically devoted to your business activities.
10. Check the copyright of everything you include on your site.
Before you launch your website, double-check that everything on it is content you’re legally allowed to use.
“E-commerce websites are loaded with copyrightable content (text, photos, music, video, product photos, etc.). If the owner of the site is not the creator they need to ensure that they have the rights and licenses required to use the content on their site,” says Wieser.
You may see people around the web sharing memes and images from popular media, but that doesn’t mean you can get away with it on your business site. Stick with either original content you’ve created yourself, hired someone else to create or content that you’ve paid to use.
In many ways, starting an ecommerce business is easier than other forms of entrepreneurship. You have lower startup costs and can do most of the work from anywhere you have an internet connection. But that doesn’t mean you can skip the various legal requirements when getting started. Meet with an attorney to discuss your options and ensure you take all the necessary steps to start your business on the right page.
Do you still have questions about starting an ecommerce business? Ask us in the comments below!