Licensing requirements for starting an online business

Today it's easier than ever to launch an online business. Services like Shopify and Magneto help you set up a website and payment gateway, while marketplaces like Amazon and Etsy let you place your goods in front of a global audience.

But entrepreneurs interested in selling online may be confused about government regulations and licensing requirements. In many ways, an online business is no different than a “brick and mortar” store, as many of the same government licenses and permits will be required. But there are several important distinctions that a would-be digital entrepreneur should be aware of before launching their business.

Ahead, we'll briefly review the pertinent licenses, permits, and registrations that stand between you and your business's online opening day. Note that all of these suggested steps come with important clarifications and caveats. This cheat sheet is not legal advice, and you should consult with an attorney or local economic development agency to get further details.

Register your business name

This is usually the first step to starting a business. If you're operating as a sole proprietorship, however, you don't need to register your name at the state level—although many states do require sole proprietors to use their own name as the business name unless they formally file a "doing business as" name.

Visit your secretary of state’s website for learn about state-specific requirements, and (if you're ready) to register your business name.

Obtain an Employer Identification Number

An Employer Identification Number (EIN) is a federal identification number issued by the Internal Revenue Service to identify a business entity. Nearly all businesses are required to have a tax identification number, which can be obtained online from the IRS.

If your business is operated as a sole proprietorship (and you have no employees), you can use your social security number in place of an EIN on governmental forms and other official documents. However, most small business advisors recommend getting one anyway in order to keep personal and business taxes separate.

Most states require a separate state tax identification number if your business is going to hire employees, or sell goods or services.

Register with state labor agencies

If your online business has employees, you with will need to register with the state workers' compensation and unemployment departments. In some states, you must register even if you are the only employee. Your application for a state tax identification number may, in some states, also register you with these agencies.

Obtain a sales tax permit

If your state has a sales tax and your business involves selling products or services, then you may need to acquire a state tax permit (also called a "seller's permit).

However, if your online business does not have an actual physical presence (known, in legal terms, as a nexus), then you are likely not required to collect sales taxes for that state. "Physical presence" can mean a number of things—including having an office, having a warehouse, or storing inventory—and the definition varies considerably from state to state.

If you are uncertain whether or not your business qualifies as a physical presence, visit your secretary of state’s website.

Obtain any relevant occupational licenses or industry-specific permits

Some professions require a state-issued business license. Getting approved for such a license generally requires the applicant to demonstrate certain skills or training. States usually require licensing for anyone who provides personal services, including medical care, law, real estate, or auctioneering.

Few of these licenses are going to apply to online businesses (unless, say, you earn a commission from running an auction site), but it's worth checking with your secretary of state website to be sure.

Online businesses involved in operations directly regulated by federal agencies must obtain permits or licenses from those agencies. For example, if your business involves sending animals or plants across state lines, then you must apply for a permit from the U.S. Department of Agriculture.

The Small Business Administration website features a comprehensive review of federal licenses and permits.

Brush up on online business regulations

The most important distinction between online and offline businesses regards particular laws related to digital privacy, security, copyright, and taxation. Many of these rules and regulations concern online retailers, but even if you're not selling anything through your website laws covering digital rights and online advertising may still apply to your business.

The Small Business Administration provides a detailed rundown of the specifics of online business law. You'll want to read this post and perform further research as necessary (especially if you're operating your own ecommerce website) before you start making any sales.

Check your zoning codes

If you're operating your online business from your home, you'll want to review relevant city or county laws to see if you need to obtain a home occupation permit. This step is especially important if you're holding substantial inventory or having customers visit your home.

This post from the Small Business Administration provides more details on running a home-based business.

Get further information about licenses and permits

Want to learn more about government requirements for starting a business? Try our SBN 101: Guide to Business Licenses & Permits, which explains the different types of licenses and permits, identifies the different government agencies that issue them, and walks you through the best practices for applying. You can download the guide here.