Legal Considerations for Starting an Online Business

starting an online business
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I was recently asked to put together a legal resource for an online community I am a part of. They asked me to answer some of the frequently asked questions from people that are starting an online business. Here is the edited version of that resource with additional links to articles and helpful resources for you as you consider your legal options.

One of the things I did not mention in this article is the importance of properly naming your business and making sure you are not infringing on someone else's intellectual property.  You should be sure to read the articles I've prepared that discuss those issues as well.

And if you haven't already, you should take a minute to sign up for my email list and download my Business building legal checklist for a full rundown of all the information you need when starting out.

What does it mean to register your online business?

Registering your business can mean a lot of different things, but for purposes of this resource guide we are talking about forming a “corporate entity” that is separate and distinct from you personally.

When do I need to properly register my business?

One of the biggest mistakes that many entrepreneurs make when they are first starting out is that they fail to set up a corporate entity from the get-go. Setting up a corporate entity is fairly inexpensive (fees and requirements vary by state and the type of entity you choose), and typically does not take too long to get approved. (In some states, you can even file online in a matter of minutes).

If you do not register right away, by default you will be treated as a sole proprietor and subjected to unlimited personal liability for the activities of your business. This can be a major problem if you are providing advice or selling products on your website.

What are my options to incorporate?

There are two main business entities that most online entrepreneurs will consider. A limited liability company (LLC) or an S-corporation. There are pros and cons to each, and filing fees for each will vary by state. Most people elect to form an LLC – depending on your situation this may or may not be the correct option for you.

A third option is a C-Corporation. Unless you are seeking venture capital or are a non-resident alien of the United States, this is an uncommon entity for a startup online entrepreneur.

We recommend speaking with a qualified legal or tax professional before you choose a business entity.

How do I form an LLC or S-Corporation?

You will need to file either Articles of Organization (for an LLC) or Articles of Incorporation (for a Corporation) with the Secretary of State’s Office in the state in which you reside.

If you are forming an S-Corp, you will file Form 2553 (electing S-corporation status) with the IRS after you have received the tax ID number for your corporation and the file-stamped articles of incorporation back from your Secretary of State’s office.

What other things do I need to make my online business “legal”?

After you have formed your corporate entity, you will need to apply for a federal tax ID number.

After you received your Tax ID number and your file-stamped Articles of Organization or Articles of Incorporation, you will take these documents to your favorite bank to open up a business checking account.  

*As an aside, I recommend setting up multiple accounts as outlined in the popular book, Profit First by Mike Michalowicz (Amazon affiliate link).

What if I am going into business with a partner?

If you are going into business with someone else, you must have a written agreement between all of the business owners. If you don’t, you are setting yourself up for some serious problems down the road. Partnerships without an agreement never end well.

What contracts do I need for an online business?

The only contract that you must have in place, by law, is a privacy policy for your website. Without a solid privacy policy, you are breaking the law in any state that requires one. In addition, any Facebook Ads or Google Adwords that you attempt to run will get rejected without a privacy policy on your landing page.

Here are some other contracts that, although not legally required, are highly recommended that you have in the footer of every page of your website:

  • Terms of Service (for your website)
  • Legal Disclaimers
  • DMCA takedown notice
  • Permissions Policy
  • Terms of Use (for any online programs/trainings available for purchase – will be linked to from the checkout page and the footer of your online program)
  • Affiliate Agreement (if you are bringing on affiliates to sell your products)

Here are the offline contracts that we highly recommend, especially if you are still doing freelance work:

In addition, if you are running a niche or authority affiliate site, you want to make sure you have conspicuously and properly disclosed that the links on the site are affiliate links, and that you will earn a commission if the site visitor purchases the product or service that you are promoting.

Where should I register my company?

Many online entrepreneurs who reside in the United States are under the mistaken impression that they should incorporate in Wyoming or Nevada or someplace else with no income tax, and thereby avoid paying income tax in the state in which they live. THIS IS INCORRECT.

If you are living in one of the 50 United States, then in almost every situation, you should register your business in the state where you primarily conduct your online business.

The only exception is if you reside outside of the United States for an extended period. In those situations, you may pick a certain state if there are tax or other advantages to doing so.

However, we highly recommend that you seek out professional advice on these issues before you decide where to form your corporate entity. International tax treaties can get very complicated and it is important to get solid advice so that you don’t screw this up this very important decision.

What if I need more information?

Here at Hawthorn Law, we are happy to help. Just click here to schedule a strategy call at your convenience.

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