Entrepreneurs in the retail realm have a lot to consider when getting their startup off the ground. Finances, inventory, marketing, branding, operations and customer service are just a few of the critical, and somewhat obvious, components that require upfront planning. What many new business owners might not think about when getting ready to sell products is licensing, particularly if they don’t have a physical location. But retail businesses may have to have permits or licenses to legally complete transactions. Now that you are asking yourself, “Do I need a business license to sell online?” (and just felt that brief moment of panic), let’s get to it.
It’s all about location
Whether you need a license sounds like a yes or no question, but like most things in life, it’s not so black and white. To get the answer that applies to your specific situation, take a look at the business license requirements of both the state you live in and the jurisdiction in which you actually intend to locate your business.
For example, in Los Angeles County, California, a standard business license is not necessarily required, but there are rules you have to follow. A business must file for a Doing Business As name (DBA), get a resale permit, and run an announcement about the DBA in a local paper for four weeks before selling any products. If you move to another county in California, as soon as you change the address on your resale certificate and send your taxes to the state, you may be contacted by your new county and informed that now you DO need a business license.
Knowing what is required by your state or county can save you a lot of hassle later, so before officially opening any type of business, even if online, find out the local rules.
The Small Business Administration (SBA) has compiled links to state license offices to make it easier to do so. In general, which licenses or permits you need to operate your business are determined based on industry and where specifically it is located. According to the SBA, examples of types of licenses or permits you may need before opening your business include:
- A sales tax license (more on this later)
- Zoning permits (which may have restrictions on signage, number of visitors allowed, and level of noise)
- Federal licenses (if you run a business in an industry that is federally regulated)
- Professional licenses (to show a level of expertise — doctors, dentists, vets, hairstylists, etc.)
- Home occupation permits (usually for freelancers or consultants)
Do I need a business license to sell online out of my home?
When cities/towns require a business license, that applies to any type of business, including one operating out of your home. If you do not have frequent carrier pickup/deliveries and do not store inventory, your license will be simpler to obtain.
More complex licenses, such as those where you sell both on and offline, may require more detailed inspections and even talking to your city planning and zoning department to establish whether operating a business out of your home violates local zoning restrictions, or CCRs. That could be the case if you have quite a few customer visits or frequent carrier pickups and deliveries.
Play by the rules
Pretty much every state requires businesses to get some kind of permit or license to operate legally, as it allows the government to keep track of companies and required taxes. This applies to every shop, whether a brick-and-mortar, eCommerce or out-of-your-home business. You also have to maintain your licenses once you get them, so make sure you renew on time, keep records and display them, if necessary.
If you don’t constantly have what your state requires, you could face fines or penalties and may have to shut down business until you are registered correctly.
Don’t forget sales tax rules
Along with acquiring a business license, certain states may require a sales tax license for businesses completing online transactions. For a long time, to encourage eCommerce, many jurisdictions didn’t require companies selling over the internet to pay sales taxes if they didn’t have an actual physical location in the state. Then Amazon became phenomenally successful and states began to question how much revenue they were losing. Big companies are now forced to abide by state sales tax rules.
The federal government has also considered legislation — the Marketplace Fairness Act of 2013 — that would affect large online retailers and how online sales taxes are collected in all states. The proposed federal law would allow a state to require sellers not physically located there to collect taxes on web and catalog sales made to people in that state. But these states would have to meet certain criteria to simplify their sales tax laws and make collection easier before they could require sellers to charge sales tax.
For easy reference on the rules regarding sales tax, Nolo.com has created a page devoted to the different requirements of different states (some of which have no sales taxes at all).
The short answer to your question, “Do I need a business license to sell online?” is yes.
If you are going to start a business, it doesn’t hurt to get a business license, even though it may not be required in your jurisdiction. It can even be a benefit, as having one may make your company seem more legitimate and gives you the ability to claim tax deductions for business expenses.
At the end of the day, a license can save you potential heartache, it doesn’t cost much and it makes your company look more professional. It might even make you more successful.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.