It has never been simpler to sell online. So when does selling become a small company due to the use of an app or platform? Find out more here.
What you’ll discover:
What distinguishes a vendor as a business?
What are the prerequisites for internet retailers?
What is the difference between self-employment and operating a small business?
When do I need to register my company?
The internet has enabled anybody to sell nearly anything across the country or even over the globe. People are increasingly embracing internet applications and platforms to sell commodities, such as handmade, used, or collectable objects. Some do it for pleasure or to augment their income, while others do it for a livelihood. But, this raises a significant issue of when just selling items online becomes a company and necessitates satisfying legal obligations. Here are some rules and pointers for starting an internet company.
Table of Contents
What distinguishes a vendor as a business?
Just because you generate money online by selling your old comic book collection or a trunk full of vintage items does not imply you own your own company. Yet, there is no hard and fast rule for when a series of internet transactions becomes a company. Most apps, websites, or platforms that facilitate private transactions and charge a commission will, however, include some basic criteria for sellers. Some may even supply tax forms or other limited services or counsel to assist.
The IRS provides a list of questions to help you determine if you are operating a business:
Do you run the activity like a company, maintaining financial records and all?
Is the money from the activity required to cover your living expenses?
Do you anticipate making a profit from the activity during the next five years?
Have you already profited from this sort of activity?
If you answered yes to any of the questions above, you could be operating a company. Even if you’ve been selling online for years without thinking of it as a company, you should create a Business Plan and consult with a lawyer. Whether your activity is a pastime, a few private sales each year, or a corporation, you must still disclose your earnings to the IRS. The distinction between both occupations is determined by whether the money you make is classified as other income or self-employment income by the IRS. Self-employment income is taxed at a higher rate.
What are the prerequisites for internet retailers?
The particular rules governing business operations differ from state to state, although many requirements are identical, and some may transcend state lines.
Establishing a business
Asking a lawyer is the simplest approach to determine what legal criteria must be satisfied to establish your company. Depending on where the company is situated, you may require some or all of the following, or perhaps more, to get started:
Business license: Several states require everyone who does business to get a business license. They are most likely available through the county or municipal clerk’s office in your region, and they are reasonably priced.
Doing business as (DBA) license: A DBA license allows you to do business under a different name even if you do not establish a formal corporate organization.
Employer Identification Number (EIN): An EIN is a one-of-a-kind identification for your company. EINs are issued by the IRS for tax reasons, but they may also be used for other purposes. To create a business account, most banks, for example, demand an EIN. You may have to create a personal account in your own name and Social Security number if you do not have an EIN.
Seller’s license: Depending on your location, you may be required to hold a seller’s license or permission. Even if you need a business operating license to operate any kind of company, you may also require a seller’s license if you sell items.
If you operate your internet sales company from your house, you may require a home occupancy or home occupation permission. You may conduct a company from home in this manner without violating zoning restrictions in your city or county.
Practically every state and county in the US mandates retailers to collect and remit sales tax. If your software or platform does not automatically collect sales tax, you may need to do it manually. To do so, certain states demand a sales tax license. Other states may levy sales tax on online purchases made by out-of-state vendors who ship to clients in those states. If you conduct a lot of business in other states and your platform doesn’t handle taxes, you should find out whether you have to fulfill sales tax laws.
Managing a Business
After you’ve established your firm, such as by obtaining the necessary permits, you may need some of the following to operate it:
Contracts and sales documents: Platforms have standards in place for transactions between buyers and sellers, but you may wish to create your own. For example, adding a Bill of Sale with each item you ship keeps a record of the order for both you and the buyer. A Bill of Sale may help you avoid unfavorable internet reviews by giving clients another means to contact you to settle any issues.
An Internet Privacy Policy helps safeguard your company by informing everybody who visits your website about what information is collected and how that information is handled.
Online Terms and Conditions: Defining your Internet Terms and Conditions is often critical. Many customers will read them to understand your rules, especially those concerning shipping, returns, exchanges, and refunds.
Intellectual property protection: Generally, trademark law protects brand names, slogans, logos, and other designs that identify your company or product. A trademark may be registered with either your state or the federal Trademark Office. Other inventions you could employ in your company, such as website content, graphics, menus, and so on, can also be protected under copyright law.
Legal and tax advice: It may be advisable to get legal counsel to ensure that you are abiding by all applicable laws. Moreover, when tax season arrives, paying for expert tax assistance may frequently save you money.
What is the difference between self-employment and operating a small business?
The primary distinctions between self-employment and operating a small company are how you pay yourself, how you pay taxes, and how you maintain records.
A self-employed individual may have a DBA or operate as a lone proprietor under their own name. They usually pay self-employment tax and record their company revenue and losses on a Schedule C that is connected to their personal tax return. Companies, such as corporations, submit a distinct form of tax return and preserve separate financial records from the company owner. Another significant distinction is that a corporation or LLC shields the company owner from liability for business obligations.
If you wish to convert from a sole proprietorship to a corporation or LLC, the procedure is typically rather straightforward with the correct help.
When do I need to register my company?
Not all companies are required to register. It is determined by the size of your firm, the nature of your activity, and the legislation in your location. If you are doubtful, consult with a lawyer.
Small company entrepreneurs sometimes wait until they have enough income or profit to cover the fees of registering. But, if you are obliged to register, failing to do so may result in late fees, penalties, or fines. Before engaging in the kind of business operations included in most Business Plans, you must normally register and get the necessary company licenses.
