Starting an online business on eBay, Amazon, Facebook, Walmart, Jet, and Etsy has become very popular! eCommerce specifically has a low barrier of entry and enables entrepreneurs to get their product or service in front of customers quickly. But one of the most common questions we get at Coursenvy is, “What do I have to do to start a business?” Way too many people hear business license, incorporate, LLC, accounting, sales tax, sellers permit… and RUN the other direction! Remember, all good things take WORK!
***Before I go on, I must first write this quick disclaimer: I’m not a lawyer or a certified public accountant of any kind. Nothing I say or write should be held against me or my companies, and this information shouldn’t be taken as legal advice. If you’re looking for professional advice, I recommend consulting with a lawyer or CPA on your own.
Do I REALLY need to “Legally” Start a Business to Sell on eBay, Amazon, Etsy, etc.?
Actually, no – as long as you aren’t making a profit, you can buy and sell on these websites and marketplaces without creating a business entity. I actually advise all my students to buy and sell a few items online before jumping in completely. BUT, the second you start making a profit (income is greater than your expenses), the IRS will have their hand out!
Most marketplaces and eCommerce websites require a W-9 for you to sell on them. But take note, neither eBay nor PayPal reports transactions to the IRS; so this means you will have to keep records of income and expenses to give to your accountant for filing taxes!
Before ANYTHING, Create your Business Plan!
Too many people I know jump head first into an online business without first planning the business! You are in luck, we offer a FREE course on the entire subject of Entrepreneurship, just click here: https://www.coursenvy.com/entreprenvy/
How to Register your Business in 5 Steps
Now it is time to register your business! By registering your business, you will be able to open a business bank account, write off business expenses, and set up wholesale accounts with suppliers. So let’s delve right in!
1. Register your DBA or “Doing Business As” Name
If you are operating an online business under a name other than your own, you may need to register a “Doing Business As” name, also known as a DBA, Fictitious Business Name, trade name or assumed name. You can do this directly with your local government. If you’re not sure whether you need to register a DBA, check with your local government office OR Google “STATE NAME STATE COUNTY Fictitious Business Name”… for example “California Los Angeles County Fictitious Business Name”. Before you file your Fictitious Business Name application, make sure your name isn’t already registered and trademarked.
1st – Google search “STATE NAME STATE COUNTY Fictitious Business Name SEARCH” for example “California Los Angeles County Fictitious Business Name SEARCH”. Here you can search your counties record for your potential business name to ensure yours is available.
2nd – Go to http://tmsearch.uspto.gov and click the Basic Word Mark Search (New User) link. Then just type in your business name and check if your business name is available. Sometimes a trademark will exist already.
Look at the LIVE/DEAD column to see which trademarks are still active. If you see a LIVE trademark for your business, don’t fret just yet. Click on the Word Mark link and see what the trademark is for. Sometimes if the trademark is for a business or product that has nothing to do with your brand, you should be fine registering it; but again, consult with a lawyer before proceeding.
2. Choose a Business Structure
Many small businesses operate as sole proprietorships, meaning there is no legal difference between your business and you, as an individual. You’ll also file your business taxes on your personal income tax. No formal action is needed to form a sole proprietorship. Often, online marketplace business owners file for incorporation or become an LLC to help separate their business and personal finances and gain legal protection as a business entity. Consult a lawyer or legal expert to help you determine the pros and cons of incorporation and how to register. Here is a great Pat Flynn post on the subject of forming an LLC.
3. Obtain Business Licenses and Permits
Business licenses and permits are a necessary part of doing business and are required by your state and local government. Even online and home-based businesses cannot operate legally without them. Use SBA’s License and Permit tool to find out what’s required. For example, in California to sell online you need a seller’s permit: https://www.cdtfa.ca.gov/taxes-and-fees/faqseller.htm
If you plan to buy items at wholesale and resell them, you will need to issue the supplier a resale certificate. Businesses buying for resale purposes must provide a resale certificate to the seller to avoid paying the sales tax. A copy of the certificate is the proof the seller needs if the state ever questions why he did not collect tax for the purchase. Resale certificates usually require the business owner to identify the items they need to purchase tax-free to prevent them from purchasing other items. Some states may require a business to complete an application to obtain a resale certificate and others may provide a list of information the purchaser must provide in the form of a letter, memorandum or note to the seller. Resale certificates are not usually transferable across state lines. Resale certificates also are known as nontaxable transaction certificates, sales tax exemption certificates, and sales and use tax resale certificates.
The resale certificate may be in any form so long as it contains:
- The name and address of the purchaser.
- The purchaser’s seller’s permit number (unless they are not required to hold one1).
- A description of the property to be purchased.
- An explicit statement that the described property is being purchased for resale.
- The date of the document.
- The signature of the purchaser or someone approved to act on his or her behalf.
Here is the California Resale Certificate template: http://www.cdtfa.ca.gov/formspubs/cdtfa230.pdf
4. Get a Sales Tax ID/Permit
You’ll need a sales tax ID in order to collect and pay sales tax. The law about collecting sales tax online can be confusing and is explained here. Many online marketplaces offer tools to help you calculate sales tax, but as of now, it’s your responsibility to pay it. We personally use and LOVE TaxJar. Tax Jar makes sales tax filing easier for online sellers and merchants. We use it to collect all the sales we make in California on ALL our eCommerce websites (Amazon, etc.) With a few clicks, TaxJar will be integrated into your marketplace and TaxJar will instantly prepare your state return-ready reports. TaxJar will even AUTO FILE your returns! Click here for a FREE 30-day trial of Tax Jar: https://www.taxjar.com
In order to collect sales tax, your state may require you to obtain a sales tax permit. You can find SBA’s links to state tax resources here.
5. Get a Federal Tax ID
If you have employees or are structured as a partnership, corporation or other types of organization, you’ll need to get an Employer Identification Number (EIN) from the IRS. It’s the business equivalent of a social security number. You can apply for an EIN from the IRS online.