Doing your due diligence to ensure that your business is protected from common legal pitfalls can go a long way in providing peace of mind when you’re first starting out.
Online businesses are subject to the same rules, taxes, and legal risks that traditional businesses are, so it is important to do your research ahead of time and ensure you and your business are protected.
We have included some common topics you should be familiar with if you’re starting an e-commerce business. However, because this article is informational only, we recommend you contact a lawyer for advice specific to your situation.
Get a Business License
Even if you are starting an e-commerce business with no physical presence, that doesn’t mean you’re exempt from needing a business license. Not getting a business license for your e-commerce business can expose your business to the risk of fines from the government. Local laws will vary depending on where you are located, so it’s important to research the requirements for e-commerce businesses in your province or state. Completing your own research on business license requirements before you begin selling anything will ensure that you are following the correct rules and that your business is not at risk of being fined or shut down.
Pay Your Taxes
All businesses are required to pay taxes to the government, whether they operate online or not. The requirements and tax rates will vary based on which country, state, or province you are operating in. The Canada Revenue Agency (CRA) states that all existing tax laws that apply to businesses also apply to business conducted over the internet. You can find additional details on the CRA website.
In the United States, the Internal Revenue Service (IRS) states that internet sales are subject to income tax. Depending on the structure of your business and the state that you operate in, your tax requirements will vary.
Figuring out the taxes for your e-commerce business can be complicated and time-consuming, to help make your business taxes easier it may be worth hiring an accountant to give you a hand and ensure everything is in order.
Incorporate Your Business
Incorporating your business is the process of creating a new business structure so your new e-commerce business can be recognized as an entity or person under the law. By incorporating your business, you can benefit by protecting your personal assets and paying fewer taxes. To get your business incorporated, you will need to complete a lot of paperwork and pay the applicable fees which may vary depending on the type of business structure you’re setting up.
The three most common ways to register your business are as a sole proprietor, an LLC, or as a corporation. Incorporating your business as a sole proprietor is the most common way to register your business, this is because there are minimal expenses and paperwork to complete. However, as a sole proprietor there is no separation between your assets and the assets of your business, so you do not have liability protection.
If you decide to incorporate your business as a Limited Liability Company (LLC), then you will have liability protection, and the income will be taxed as personal income to the business owner. The rules to incorporate as an LLC can vary from state to state, so be sure to look up the specific requirements for the state that you operate in.
Finally, you can choose to incorporate your business as a corporation. Becoming a corporation is the most difficult due to the amount of paperwork and supporting documentation that you will have to submit. However, the benefit is that the corporation is a legal entity separate from the owners, so you will generally be free from liability. Corporations are also subject to double taxation because the business's income will be taxed along with any payment made to you as a salary.
Protect Your Intellectual Property
You’ve probably put a lot of thought, time and money into your e-commerce business, so you’ll want to ensure that you protect your intellectual property, or "IP". There are three main ways that you can protect your intellectual property including trademarks, copyrights, and patents. How you apply for and obtain each one will vary depending on where you are, but here is what you may need them for:
Trademarks: Brand names, slogans, catchphrases, logos, symbols, or brand mascots
Copyrights: For original works of art including books, music, movies, plays, songs, and other creative works
Patents: Review the patent law for your jurisdiction to see what qualifies as being patentable
Know Your Anti-Spam Laws
With the increase in emails sent by all types of companies, many countries have enacted anti-spam laws that govern how businesses can contact customers and the options they need to give customers to unsubscribe or opt out. Canada uses the Canadian Anti-Spam Legislation (CASL), and the United States uses the CAN-SPAM Act to govern how emails and commercial messages can be sent to recipients. There are also anti-spam laws in Europe such as GDRP, which applies to businesses who sell to or interact with consumers in the European Union, even if your business is in Canada or the US. Understanding the requirements of the different anti-spam laws and their consequences is important for your e-commerce business because e-commerce often relies heavily on email marketing to connect with customers. If your business is not following the requirements of the anti-spam law, the penalties can be significant.