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Online stores are a great way to start a business without having to invest in all the traditional startup costs of a brick and mortar address. However, just because the store is digital doesn’t mean it gets a pass and the freedom to operate willy-nilly. Whether a business is online or at a physical address, it operates within the parameters of local and state jurisdictional rules, and those are most often realized in the form of business licenses and permits.
The upside of a digital business is that you don’t need to automatically deal with all the various nuances associated with a physical business. That includes lease and rental agreements, property management, property insurance and similar. However, operating electronically only doesn’t mean the paperwork of the business is avoided.
An e-commerce store is still going to need:
• A business operation license or business permit
• An employer identification number (EIN) if not using the owner’s social security number for tax identification
• A Doing Business As (DBA) License if your company isn’t using your name in it
• A Seller’s Permit for selling goods
• A Sales Tax License
• A Home Business Permit if it applies
• An Occupational License for some business types
A Business Operation License or Business Permit
The most basic, fundamental license for any business is the business permit or business operation license. It goes by a few names, but this authorization basically identifies the business as valid in a specific city or county. It also helps the local government collect fee revenue from the business for its own needs and to pay for regulation activities. These efforts make sure only valid businesses are being operated, which protects the industries as a whole as well as the public and customers.
The local City Hall is usually a good place to start. Cities typically have an office of revenue that handles the permitting process. If outside the city jurisdiction, the county administrative office will be the default for a similar license. New business owners will fill out the necessary identification forms, business information, address location and provide their own identification. Once the fee is paid, then the permit is issued and renewed annually. The annual fee will then vary usually depending on the total income the business makes annually.
The Employer Identification Number (EIN)
Generally, the EIN is created by applying for the account with the federal Internal Revenue Service (IRS). It’s intended to be used for tracking and paying payroll taxes that an employer must account for when hiring and paying employees. The employer pays a share, and the employee has a percentage reduced from his or her pay for the other half. Both go to the IRS for income tax withholding as well as Social Security deposits to be received again in retirement.
An online business does not have to have employees already to have an EIN either. The EIN is not required per se without workers, but it’s a great way to have a recognized tax number for various business transactions without giving out a personal Social Security Number of the business owner all the time, rising identity theft.
The DBA or Doing Business As License
A Seller’s Permit
If you’re selling product, the seller’s permit is necessary. Most states want to be sure any businesses in their jurisdiction are collecting and paying sales tax. This taxation generates an amazing amount of income for state governments, and it varies in level from county to county. Product sellers are required to pay the tax, whether their customers pay it or not. So, most businesses add the sales tax as percentage onto their final price and then pass the money collected onto the state sales tax agency monthly, quarterly or annually, depending on the size of the business income.
Not every business needs a seller’s permit. For example, an online company only providing services doesn’t collect or need to pay sales tax, so it doesn’t apply.
The taxes paid with the seller’s permit is generally straightforward in obtaining, but filing one’s sales tax returns can be complicated. This is because the sales tax collected varies, depending on where the product is sent within the state. Usually, there’s quite a bit of fluctuation in sales tax rates applied from one county to the next. The online store business has to make sure it keeps track of where the product goes as well as how much as paid. Both affect how much sales tax is paid for each county the product is sent to in the same state. If, however, the product is sent out of state, then the sales tax no longer applies. This would be a violation of federal laws barring restriction of interstate commerce.
No surprise, many online stores have a majority of their business from out of state customers versus in-state.
The Home Business Permit
Local governments want to make sure businesses that can be disruptive only operate in areas of town that makes sense for their activities. As a result, while it is possible to operate a digital store from your home and personal computer, you will still need a home occupation permit. For many cities this permit is often combined as a selected feature with the general business operation permit or license noted above. The city reviewer will look at the business information and confirm that it is appropriate to have within a residential zone. If so, the permit will be approved, or allowed with certain restrictions. If not, the business permit will be denied, which means the online business cannot operate from the home address. Continuing to do so could subject the business owner to penalties if found out.
An Occupational and Other Licenses Might Apply
Depending on what an online store actually provides, an occupational license may be required. For instance, if someone wants to sell legal advice or legal documents online, he or she needs to be a licensed attorney with a license to practice law provided by the State Bar. This is a classic form of an occupational license that applies whether the legal business is online or in person like a traditional law office. Psychology, medicine, engineering and similar all require professional licensing as well, regardless of whether the product is delivered electronically or in person.
Certain types of product will also require the online business to have an occupational license as well. This is common with products that need special training to be used, are considered hazardous without precautions, or can affect public health.
Some business may also need additional industry licensing and permits. For example, home businesses that sell food products designed with a long shelf-life and can be shipped easily operate as e-commerce stores, but their products will be regulated by state and county health agencies. In addition to all the licenses and permits above, the home food-making business will also need permits from the state or county health department as well.
The Cost of Licenses and Permits
In a nutshell, the cost of licenses and permits for an online story can vary significantly. Some business licenses are charged a sliding scale. The amount is typically a percentage, and it increases or decreases based on some defined factor, usually the gross income the business produces in a calendar year. Other charges are flat fees. The amount is determined by the local government through its own municipal code or regulation creation process, and the figure is paid the same, whether it’s a small business or a very large one.
Usually, smaller, more obscure permits and licenses will run anywhere from $50 to a few hundred dollars. Far more common licenses can run in the hundreds of dollars easily. Some argue this creates a barrier to businesses, but others rebut that it allows the monies to benefit to the entire community when a business operates and is successful.
Planning to Start Your Online Business?
One of the best ways to success with an online store is to make sure all of the above licensing and permits are thought about and taken care of before the business starts online. This might end up requiring some spending first before the business makes its first sale, but it’s worth the trouble. The penalties involved of doing otherwise can be painful and a lot more after the fact. One of the best ways to address this challenge is to build in the cost of the licensing and permitting needed up front when pulling together the cash or financing to start the business at the beginning. These costs are viable, related to the business start and necessary. So, they make sense to be included in the business start capital investment. In addition, they are bona fide business expenses, which means they are tax-deductible and help reduce the online store’s tax exposure after the fact during the first tax return reporting after the initial year of operation.
The most comprehensive source for online store license and permit information is online through government agency websites where the digital store will be located. Most agencies today have a website with both the permit information as well as the necessary forms, all of which can usually be downloaded. Start with a search engine to narrow down the various sites to review for a given license, and make sure to use your location of your home or business address for reference. This helps locate the agencies that apply to your business the most when going through the search results. Then, spend the time reading through all the information provided to make sure you choose the right permit. It helps to talk to businesses in your area as well just to get an idea what they typically have on file as well for comparison. And, finally, have a good amount of patience. “Red tape” is a necessity to operate a business, but it doesn’t need to be Mt. Everest with some solid homework ahead of time before getting started.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.