Starting an online business is easier and less costly than starting a traditional brick-and-mortar business. That doesn’t mean that you should skip the formalities. Starting an online business legally can save you vast amounts of headache down the road.
When we registered Harshman Services to obtain a business license, it was straightforward and simple, and only took a couple of hours of actual time. I’m not counting the time spent waiting for the notice to run in the paper for three consecutive weeks. Filling out the paperwork just took a few minutes. I think it took longer to get my kids to stop chatting the clerk’s ear off than it did to fill out the forms she needed.
Which business structure to choose
Before heading to your local courthouse to fill out forms, determine what structure your business will take. There are entire books on this topic, and I’m only going to touch on the different options here. It may be something you’ll want to talk to your lawyer about. Yes, it’s that important.
Sole proprietorship is the simplest, but it’s not risk-free. There is unlimited liability, meaning that someone could sue you and your responsibility to pay (liability) is not limited to your business assets. They can come after your home and other personal assets as well.
In a sole proprietorship, there’s one owner, although a married couple can comprise a sole proprietorship. I found that it can be difficult to convince a bank of that fact, however. A couple of banks I visited wanted only one person’s name on the business in order to open a business checking account. They refused to believe that a sole proprietorship could consist of a man and wife.
The big draw of a sole proprietorship is that you call all the shots. Another one is that your taxes may be simpler than with some other forms. It’s certainly faster to set up.
Partnership business structure
Partnership is another form a business may take. It has risks that other forms do not have, including that you may be liable for not only your own actions, but for those of your partner(s). If you are equal partners and you can’t agree with your partner(s), you could lose your business.
Of all the businesses I’ve seen, I’ve never seen a partnership do well in the long run, even among the best of friends. It often happens that to save the business, one partner has to buy out the other partner, and might not be in a good position to do so. The successful partnership seems to be the fairy tale of business structures. Having an exit strategy and everything in writing can help. Doing business on a handshake is asking for trouble, no matter how strong the friendship is.
Corporation business structure
A corporation is a structure where the business is treated as its own entity. There are a few forms of corporations, but for entrepreneurs and small-business owners, what’s usually recommended is an S corp or an LLC (limited liability corporation).
It is easier to incorporate in some states such as Nevada and Delaware than it is in other states. You may be able to incorporate in those states even though you don’t live there. Check into it if you’re interested.
The decision of which structure to choose is an important one. One thing to keep in mind: you can take a sole proprietorship and turn it into an S corp or LLC, but not the other way around.
Cost of starting an online business legally
Find out what the requirements are at your state, county, and city levels. Some locations require only that you fill out a form, pay a $5 fee at the courthouse, then pay to run an ad in the notification section of your local newspaper, sometimes called a DBA (doing business as) notice. In our case, the cost for that ad was under $50. Other newspapers charge quite a bit more.
Once you have your business license, then you can get ready to start running your business. With a business license, you’ll be able to get a business checking account and you’ll be ready to accept payment from your customers/clients.