How to Start an Online Business

Here are the key initial steps to set up your online business for long term success.

By , Journalist

If you want to sell goods or services online, you'll have to nail down many details of your business structure and operations before you open your virtual doors. Read on for the steps you need to take to start an online business.

1. Make a Business Plan

You'll need a business plan if you're planning to attract outside investors or get a small business loan from a financial institution to help finance your start-up. But even if you intend to fund your business yourself, a business plan can help you project your needs, estimate your startup costs, and provide a roadmap to tell you when you can expect to turn a profit.

At a minimum, your business plan should include:

  • what products or services you'll offer
  • your target market
  • your expense and revenue projections, and
  • timelines for meeting your goals.

For more details, check out our article on why you need a business plan.

2. Figure Out Your Start-Up Costs

If you haven't detailed your start-up costs in your business plan (or you haven't written a business plan) you'll need to calculate your start-up costs and sales and revenue projections to determine whether you've got enough funding to get your online business off the ground.

Begin by making a list of all your expenses for the steps listed above plus any of the following that apply:

  • website hosting and maintenance
  • payment processing service fees
  • customer support services fees
  • accounting services or software
  • registered agent service fees
  • payroll costs and payroll taxes
  • advertising costs such as social media marketing, and
  • equipment costs including computers, phones, and vehicles.

Divide your list into one-time costs (items like registration fees and website development costs) and ongoing costs (such as web hosting and payment processing services).

Compare your sales and revenue projections to your startup expenses to estimate when your business will become profitable, and how much cash you'll need until it does.

If your available funding isn't sufficient, consider using an outside source such as:

  • investments and loans from friends and family
  • business loans from banks and credit unions
  • outside investors such as venture capitalists, business suppliers, and business partner companies.

Make sure you clarify and document the terms and conditions of the funding. Modify your articles of organization or articles of incorporation to account for the arrangements you negotiate.

3. Decide on a Business Structure

How you structure your business will depend on how much personal liability protection you need, what tax opportunities you're looking for, and what type of investor opportunities you want to create. The most commonly used business structures are:

If you're the only owner, a sole proprietorship is the simplest way to go but this won't provide you with personal liability protection from your business's debts and obligations. A general partnership acts in the same way as a sole proprietorship, just with multiple owners.

If you want personal protection from your business's debts and liabilities, you'll need to create an LLC, corporation, or other business entity with limited liability protection. But keep in mind that LLCs and corporations have more requirements and are usually more costly to run.

For more information on small business entity choices, see our article on business ownership structures.

4. Choose a Business Name

Unless your business is a sole proprietorship or a general partnership, you'll have to select a legal business name in order to register your business in the state or states where you operate. (In general, sole proprietorships and general partnerships legally operate under the names of their owners with no action required.)

Regardless of whether registration is required, it's a good idea to designate a unique name for your business. You can protect your rights to exclusively use your business name by registering your business name as a trademark. In addition, states often require sole proprietors and general partnerships to register their business name as a DBA (short for "doing business as"). Typically, you can protect your legal business name or DBA as a trademark.

The best advice for choosing a business name is to keep it short and simple and make sure it describes your business or product. For example, if you're selling shoes, steer clear of a name like "Walking on Clouds," no matter how comfortable your shoes are. People searching online for your product will use the product name as a keyword in their search so be sure to include it in your business name. Companies like Nike and Red Bull can afford to spend millions of dollars branding their companies; you can let your name do the advertising work for you.

5. Register Your Business Name and Domain Name

As an online business, you usually have two business names to manage: your legal business name and your domain name.

Registering Your Legal Business Name

Typically, any business structure—other than sole proprietorships and general partnerships—will require you to register with the state. You'll usually file a formation document (for example, articles of organization or articles of incorporation) with your state to create your business. Your state's secretary of state office or corporations division is usually responsible for these filings.

To learn more, see our sections on forming an LLC and forming a corporation.

Registering Your Domain Name

As an online business, your website is your store and, like a brick-and-mortar shop, it needs a name so customers can find it. The name you give your website is known as a domain name. Ideally, your business name and domain name will be the same. You can register your name through a domain registrar such as GoDaddy as long as the name isn't already taken. If the name you want to use is held by someone else, consider adding the state or city where you're located or adding your name to the business name to make it unique.

Domain names end with an extension such as ".com," ".net," or ".biz." Nonprofits or schools often en in ".org." For an online business, it's generally best to stick with ".com" because it is the most familiar.

6. Obtain an EIN

You can apply for an employer identification number (EIN)—also called a "federal tax identification number"—for your business through the IRS website. While sole proprietors and single-member LLCs aren't required to have an EIN (as long as they don't have employees), it's usually a good idea for all businesses to get one. Many banks require an EIN to open a business bank account and having an EIN helps you avoid using your Social Security number.

For more, read how to get an EIN.

7. Apply for Necessary Business Permits and Licenses

States, counties, and cities all have their own permit and license requirements for different types of businesses. You'll need to check with the appropriate agencies for your business location to see what's required. Typically, your location and business activities will determine which licenses you need.

Seller's permit (also called a "sales tax license"): Most states require businesses that sell taxable goods or services to have a seller's permit, which enables the government to keep track of taxes the business collects. You'll find details on the types of businesses required to collect sales tax on the website of your state's taxation department or division.

Resale license: If you're going to be purchasing products that you intend to resell, you'll also need a resale license or certificate. These licenses exempt you from paying taxes on products you purchase for resale.

Federal licenses: The federal government also requires permits and licenses for certain activities and sales it regulates, like alcoholic beverages and aviation. Contact the governing federal agency for more information on these licenses and permits.

For a full breakdown, read our article on the legal requirements for starting a small business.

8. Protect Your Trademarks, Patents, and Copyrights

If you have a product, logo, artistic work, or other intellectual property that you want to protect, you might want to apply for a trademark, patent, or copyright. Having these protections in place gives you legal recourse should you need it. You can apply for a trademark or patent through the U.S. Patent and Trademark Office or a copyright license through the U.S. Copyright Office.

These offices have databases of applications and registrations filed through their office. You can search through these databases to make sure your logo, authored work, invention, or other intellectual property isn't already owned by someone else.

If you infringe on an existing copyright or trademark, you could owe money damages. So it's a good idea to conduct a search before you start selling online. A thorough search will help you avoid potential legal pitfalls like selling t-shirts or other items with trademarked or copyrighted logos or pictures without permission from the owner of the trademark or copyright.

9. Select a Platform for Your Online Business

If you're selling goods or services online, you're going to need a platform that allows users to interact with you—by viewing, choosing and purchasing products. At a minimum, you'll need a way to process payments, collect sales tax, track your inventory, and ship your goods.

Developing your own website: Choosing to develop your own website allows you to have total control over your business. But development and maintenance costs are high and you'll likely have to hire a number of experts to set up and maintain all the required functions.

Using third-party platforms or marketplaces: E-commerce websites like Amazon and eBay allow you to sell your wares on their site for a fee. These types of hosts do much of the marketing work for you so you won't need a domain name, a website, or a marketing budget. They'll also handle payment processing, sales tax collection, and sometimes, other details. But you'll be limited in your ability to brand your company.

Utilizing SaaS website solutions: SaaS, or software-as-a-service hosts, allow you to conduct business over your own, separate website while they work behind the scenes to provide services like 24/7 customer support, payment processing, tax collection, and inventory management. These providers (Shopify and BigCommerce are examples) are typically subscription-based, and they offer different pricing packages geared to the size and scope of a business.

The platform you choose will depend on your business and budget. In deciding what's best for you, be sure to compare each platform's:

  • customer support
  • security protocols
  • payment options, and
  • general services.

You should also check what platforms your competitors use to make sure the platform you choose fits with the needs of your industry. Your website design will be key to your success.

10. Comply With PCI and Privacy Requirements

Online businesses are responsible for following laws, regulations, and practice standards specific to operating on the internet.

Payment Card Industry (PCI) compliance is mandated by the credit card industry. Online businesses aren't only responsible for providing secure payment options, they must also protect the customer data collected and stored. The PCI Standards Council sets the guidelines and rules your online business must follow to ensure compliance.

If you use a third party to sell your products, these protections are likely built into their platform. If you set up your own website, you'll need to build PCI compliance into your system. You'll also need encryption tools such as an SSL certificate that verifies that your online interactions are private.

11. Plan Out Inventory and Shipping

If your online company is an e-commerce business, you'll need inventory to sell. Start-ups often use their home garage or spare room to store inventory. If your homeowner association rules or rental lease doesn't allow you to conduct business from your home, you'll have to rent warehouse space and hire workers to fulfill and ship orders.

If you don't use a third-party host or SaaS platform, you'll need to decide:

  • how to ship your goods, and
  • whether and how you'll pass shipping costs along to your customers.

You'll also need a system to track your inventory so you know when it's time to restock or reorder.

12. Buy Business Insurance

Though not required by law, you'll probably want to purchase one or more insurance policies to protect your business and personal assets. (If you take out a business loan, you might find that the lender requires certain coverages.) Some of the types of insurance policies you might consider include:

  • Casualty insurance: This type of insurance protects against losses from fire, theft, and the like. (Don't count on your homeowner's policy to cover business losses.)
  • General liability insurance: This general policy covers claims by customers and other outsiders that your business or products caused injury or damage.
  • Professional liability insurance (also called "errors and omissions insurance"): This kind of policy covers service professionals like consultants against claims that their services caused harm or damage.

Businesses that have employees will probably need workers' compensation insurance.

(You can learn more by reading about what types of insurance your small business needs.)

Getting Professional Help to Start Your Online Business

As you can tell from the steps outlined above, starting an online business is involved but attainable. You can launch your online business on your own and many do so every day. Still, many new business owners find it useful to seek out legal help at some point in the start-up process.

For example, if you're unsure whether you need to register your business for sales tax in a state, it can be a good idea to reach out to a local business or tax attorney. Or, if your business needs to apply for multiple licenses and permits, consulting with a lawyer with experience in your industry can be a great way to reduce your liability moving forward. You can work with a lawyer from beginning to end or hire an attorney for one particularly complicated task.

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