Licenses and Permits for Online Businesses
Can you fly below the radar?
You may believe that it's better to "fly below the radar" and avoid registering your business with federal, state and local agencies. Understandably, you may worry that filing registrations may result in more paperwork, more taxes, and more obligations, and also raise zoning issues. That decision is up to you, but ignoring licensing and registration requirements is risky, and if discovered, may interfere with your ultimate goal of building a thriving online business. Keep in mind that these registration requirements are easy to meet — you just have to fill out a few simple forms. This section explains how to find and file the basic forms required for any online business.
EIN: IRS Form SS-4, Application for Employer Identification Number
Despite its name, this form is required for many businesses that don’t have employees. You must file it to obtain an employer identification number (EIN) — a nine-digit number that identifies your business for tax purposes, just as an Social Security number identifies an individual. Your business must have an EIN if you have at least one employee. Even if you have no employees, you must get an EIN if:
- you operate your online business as a partnership, limited liability company, or corporation (the EIN is necessary to identify your business on your tax returns), or
- you are a sole proprietor and have a Keogh retirement plan (a plan for self-employed people), buy or inherit an existing business, or file for bankruptcy.
Finding the forms. The IRS has made it easy to apply for an EIN. You can download the fillable Form SS-4 (“fillable” means that you can complete the form on screen instead of printing it out and completing it), then mail or fax it to the IRS, or you can fill out the SS-4 using the EIN Assistant at the IRS website and submit it electronically. You can also apply by phone at 800-829-4933. If you file electronically or by phone, you will immediately receive a provisional EIN, which will become your permanent EIN once the IRS verifies your application information. Don’t forget to write the number down and store it someplace safe; if you file online, print a copy of the form for your records.
Local Business License
Many cities and counties require those that do business within their limits to file a registration form — this form may be called a tax registration certificate, business license, business tax application, or something similar. No matter what the form is called, its purpose is the same: to tax your business. You may have to pay a flat fee or a rate that depends on your annual revenue. If your online business is small (as measured by its revenues), you may be exempt from a city or county licensing requirement.
Finding the forms. If you do business in a city, contact your city government to find out about licensing requirements and get the necessary forms. If you do business in an unincorporated area, contact your county government. Many local governments have websites — and some post information for small businesses and make their forms available online. You can find a comprehensive list of links to online local government agencies at State and Local Government on the Net. If you’re looking for county ordinances online, you can find them at the website of the National Association of Counties.
DBA: Register Your Fictitious Business Name
If your online business operates under a fictitious name (often called a “DBA,” for “doing business as”), you probably have to register that name with your state or county government. A fictitious name does not refer only to a completely made up moniker, such as Xerox or Kodak. Any name that doesn’t precisely match your corporate, partnership, or limited liability company name is considered fictitious. If you are operating as a sole proprietor, any name that doesn’t include your last name (or in some states, your full legal name) or seems to suggest that other people are involved in your business (such as John Brown & Associates) is fictitious.
In most places, DBAs are registered with your county government. Registration typically requires filing a registration certificate (along with a fee, of course) with the county. You may also have to run a statement in a local newspaper for a set period of time, stating your DBA and your true name.
The state wants you to register your name so it can track you down if your business does something wrong, such as ripping off consumers or skipping out on loans or bills. But there’s plenty in it for you, too. For starters, registering a DBA puts other companies on notice that the name is taken — and stakes your claim to use the name as of the registration date. Registering a DBA does not provide trademark protection, however.
There are other practical reasons to register a name. For example, some banks require a registration certificate in order to open a business bank account under a business's fictitious name. And you may not be able to enforce a contract you signed in the name of the business unless you can show that the name was registered properly.
Finding the forms. For information on registering a fictitious name, go to your county clerk’s website (you can probably find a link to it at State and Local Government on the Net). If the information you need is not there, check your state’s website.
Get a Seller’s Permit
In most states, you need a permit from the state authorizing you to sell goods to, and collect sales tax from, customers within the state. As the seller, you are responsible for charging sales tax on purchases made from your online store if the goods ship to a location within your state. In some states, the seller's permit also allows a seller to buy items from wholesalers (for resale to customers) without paying sales tax. This is a real money saver if you are a seller who buys wholesale lots from jobbers or liquidation sales within your state that you plan to resell. Some states call this a seller’s permit; others call it a resale permit or something similar. (Note: You might need a permit even if your state doesn’t have a sales tax. Even in the handful of states that don’t impose a sales tax — Alaska, Delaware, Montana, New Hampshire, and Oregon — local governments sometimes impose sales taxes, which you may be required to collect and submit to the appropriate agency.)
If your state requires a seller's permit, don’t make sales unless and until you get one. . Getting caught doing business without a permit will likely result in you having to pay the sales tax you should have collected from your customers, along with a fine.
Finding the forms. You can find information (and in some cases, forms) on seller’s permit requirements at your state tax agency’s website. To find a link to that website, check the list provided on the Small Business Administration website or among the state links at the IRS website.
Make Sure You Meet Local Zoning Requirements
When you register for a local business license, your local government will almost certainly check to make sure that your online business meets the zoning requirements for the address you provide for your business. If your business is not in compliance — perhaps because it has too many employees, or because it has frequent deliveries and pickups — you will not get a license. What’s more, you can probably expect a city or county inspector to drop by and start issuing citations (or perhaps even shut you down) in fairly short order. Ignoring the registration requirements will not work either, because you can be sure that a neighbor will report you after the UPS truck blocks his driveway a few times. Deal with your business location right away — if the zoning is not right for your business, find another location or facility where you can store, pack, and ship your goods without hassle.