Starting an Internet-based business involves a particular set of legal considerations. These include choosing the proper business entity, naming your business in a way that avoids trademark issues, posting appropriate information about your policies, properly handling sales and returns, being aware of warranty issues, and properly handling sales tax.
Choosing the Business Entity
While you could operate your online business as a sole proprietorship or partnership, you should consider using a legal form that protects you from personal liability, such as a limited liability company or corporation. An online business may not carry the same risks as a bricks-and-mortar operation; however, to the extent you are selling physical products, there is still a possibility of injury or damage to your customers or their property, just as there would be for a traditional retail business. In the case of such injuries, you would want the business, not you personally, to be responsible for any liability.
Learn more about choosing a business structure.
Naming Your Business
In naming your business it is important not to violate trademark laws. This means not naming your website in a way that might create a “likelihood of confusion” with a preexisting commercial enterprise in the same field. Such confusion might arise if the name you choose is identical or very similar to the name of another business or product.
In a pre-Internet age it was easier for people starting small local businesses to investigate the uniqueness of the names they wanted to use because it was assumed that there were certain geographic limitations on business names. Now, however, you need to be concerned about trademarks and trade names that may be in use by just about anyone just about anywhere in the country. If you know there is a popular online seller in Kentucky named eChocolateGoodies.com and you want to name your Idaho-based business ChocolateGoodiesOnline.com, then, regardless of the geographic separation, you will be risking a trademark infringement lawsuit.
The best approach to avoiding trademark issues is to try to make a thorough search of existing business names before settling on a name for your own business. This may include:
- a basic Internet using a search engine such as Google
- searching the federal trademark register of the United States Patent and Trademark Office (USPTO) which is available online at uspto.gov
- doing a “whois” lookup of existing domain names via internic or via individual sellers of domain names, and
- looking at filings for corporations, limited liability companies, and similar entities registered with state and local government offices, such as your Secretary of State’s office; state-level listings are usually available online.
In addition, if you want greater certainty you can hire a professional service to do a more thorough investigation of the name in which you are interested; the cost is usually a few hundred dollars.
You can register your domain name through any of a wide range of ICANN-accredited registrars. For a complete list, go to the ICANN website.
To learn more, see Choosing a Business Name FAQ, Make Sure Your Proposed Business Name Is Available, and How to Register Your Business Name.
Posting Your Policies
There is no legal requirement that online businesses post policy statements. However, there are important potential benefits to doing so, particularly if you find yourself having to deal with angry customers. Posted policies may not provide an ironclad legal defense in such cases, but they put you in a better position than if you never provided the information.
Among the policies you should consider posting on your website are:
- forms of payment you will accept (credit cards, paypal, money orders, and so on)
- warranties you provide (note that if you sell products with a manufacturer’s limited warranty and priced at $15 or higher, federal law requires posting the warranty or telling customers how they can get a copy)
- how you handle returns
- geographic limitations on sales (for example, only in the United States)
- limitations on your liability (not always effective in court, but worth stating)
- legal jurisdiction (stating where legal disputes will be heard; again, not always effective, but worth stating), and
Make sure the policies on your website are located where they are reasonably easy for viewers to find.
Sales and Returns
If you state that you are offering a product at a discount below the usual price, the discounted price must truly be lower than your regular price for the product. If you offer something for free, but in fact there are conditions to obtain the free item, you must disclose those conditions. According to the Federal Trade Commission (FTC), if you fail to follow these rules you are considered to be engaged in deceptive pricing practices.
You should provide sales receipts to your customers even if you are not legally required to do so for your particular online business. A receipt acts as a confirmation of your customer’s order and helps document your customer’s agreement to buy the listed goods at the listed price.
Technically, if a customer wants to return an item that is not defective, you are not legally obligated to take the item back. In practice, however, many online sellers, like traditional retailers, do allow returns. Often it’s good for customer relations. In the online context, however, returns can be slightly more complicated, if for no other reason than that there are usually shipping costs to be considered. If you are willing to allow returns of non-defective merchandise, you should consider a policy requiring the buyer to pay return shipping. More generally, you should clearly state your return policy somewhere on your website.
To learn more, see Shipping and Refund Rules for Businesses.
Warranties are governed by the Uniform Commercial Code (UCC). Generally speaking, there are two types of warranties relating to the goods you sell: express warranties and implied warranties.
Express warranties are statements that you make, for example on your website, regarding the quality of the products you sell and your willingness to repair or otherwise remedy defects. A statement of this sort doesn’t have to be labeled “Warranty” in order to be treated as a warranty under the law. You should exercise care in making any statements on your website that could be construed as express warranties and you will be held liable for the breach of those warranties.
Implied warranties exist regardless of whether you make any statements. Under basic commercial law, they arise whenever goods are sold. There are two types of implied warranties: the warranty of merchantability and the warranty of fitness for a particular purpose.
The warranty of merchantability is a warranty that a product is fit for ordinary purposes. For example, a wooden chair should be able to support the weight of a 250-pound person, a box of chocolates shouldn’t contain metal shavings, and a microwave oven should have a timer. You should assume you will have some liability for a breach of this warranty, although you may be able to recover damages from the manufacturer.
The warranty of fitness for a particular purpose applies when you, as the seller, have reason to know that the goods being sold are to be used for a particular purpose, and the buyer is relying on your skill or judgment to select suitable goods. As an example, consider an online seller of paints who receives an e-mail from a potential buyer asking for a recommendation for paint to be used on metal surface. If the seller recommends a paint that will only work on wood and actually damages metal surfaces, the seller will be liable for those damages.
If you have a physical presence in a state, such as a store, office, or warehouse, you must collect sales tax from customers in that state. If you do not have a physical presence in the state, there is no requirement that you collect sales tax from customers in that state. In states where you are not required to collect sales tax, but where sales tax is due to the state, currently it is up to your customers to make sure the taxes are paid.
Because online purchases have resulted in states receiving less revenue from sales tax, there has been an ongoing effort by states to require Internet-based businesses to do more to collect sales tax. Sales tax rules for online businesses may change in the future.
For more information, see Nolo's article on Sales Tax on the Internet.