If you have ever considered starting an e-commerce business, now is a great time to move from ideation to action. Online retail sales exploded to an all-time high amid COVID-19 lockdowns, travel bans, and brick-and-mortar closures, and this was not just a temporary bump. E-commerce was already experiencing strong year-over-year growth prior to 2020. The accelerated shift to online purchases is part of a broader trend. For many shoppers, purchasing both essential and nonessential items online is the new normal.
Not surprisingly, as online retail has become more popular, it is becoming more competitive. The growth of e-commerce has also created a more demanding legal and regulatory environment. While anyone can set up an e-commerce website, running a successful e-commerce business is more complicated. In addition to delivering an excellent customer experience, online retail entrepreneurs must pay special attention to legal issues regarding taxes, privacy, terms of service, and digital marketing.
Getting Started with an Online Retail Store
Starting an e-commerce business is not wholly different from starting a brick-and-mortar business. Whether your store is online or has a physical location, you will need to address the following basic issues before you are ready to get up and running:
- Choose an entity type. Every business must have a business structure, such as a sole proprietorship, partnership, limited liability company (LLC), or corporation. Different structures provide different mixes of legal protections, benefits, and drawbacks.
- Get tax identification numbers. Following the creation of your entity, you will need to obtain a federal Taxpayer Identification Number (TIN). This is necessary for all entity types unless your business is a sole proprietorship, in which case your personal Social Security number may serve as the TIN (although this is not advisable). You may also need to obtain a state tax identification number. This number is used when paying taxes, hiring employees, opening a bank account, and applying for licenses and permits.
- Open a business bank account. Having a dedicated bank account for business transactions is legally required if you own a limited liability company or a corporation. Even if it is not required for your specific business, however, it is advisable to avoid commingling your personal and business funds in a personal bank account.
- Obtain business insurance. You insure what is most important to you—your home, your vehicle, your health, and your business—to minimize risks. Online stores have different insurance needs than traditional retail stores. Choose from a range of e-commerce insurance coverage options that make sense for your company
Specific Considerations for E-commerce Stores
Despite some overlap in how they are organized and operated, there are some significant differences between online and in-person stores. These differences require special attention to avoid legal issues that can threaten your business’s success.
- Comply with state tax laws. A 2018 ruling by the US Supreme Court[1] established that individual states can require e-commerce businesses to collect and pay sales tax. Generally, an online retailer must collect state sales taxes if they have an “economic nexus” in that state. And if your business has remote employees who work in a state other than where the business physically operates, you may have to withhold state income taxes for those workers and obey local labor laws.
- Navigate privacy law issues. E-commerce stores have access to large amounts of customer information. They not only track customers’ online activity and collect large amounts of user data but also store sensitive financial information such as credit card numbers and addresses. California has taken the lead in protecting consumers online with the California Consumer Privacy Act (CCPA). Colorado and Virginia have followed suit, and more states are expected to adopt similar statutes. These new state-level privacy laws require that online sellers have a privacy policy in place, among other consumer protections. For buyers in other states, sellers may consider enacting voluntary privacy policies.
- Create terms of service. A terms of service agreement is a contract between you and your website users. Although not legally required, it can give you greater control over your website, set clear expectations for users, and protect you in the event of a legal dispute. An e-commerce terms of service agreement typically includes language addressing account terms, prohibited uses and actions, payments, refunds and returns, limitation of liability, and dispute resolution.
- Safeguard intellectual property. It is essential for e-commerce businesses to take stock of their intellectual property and protect it from unauthorized use by other parties. Your unique business name, domain name, logo, and product names can be registered as trademarks. Use copyrights to protect your creative content, such as written material, graphics, and video. Other important practices include closely guarding trade secrets and using nondisclosure agreements.
- Prevent spam. Nobody likes receiving unwanted marketing emails. Under the Controlling the Assault of Non-Solicited Pornography And Marketing (CAN-SPAM) Act, senders of commercial messages must meet certain requirements. Emails must also contain an unsubscribe link that senders are required to honor within ten business days. Failure to comply with CAN-SPAM can result in significant fines.
These considerations require strategic planning and continued monitoring. Skipping or overlooking a step could result in fines or unanticipated consequences.
Next Steps
If you are ready to start your e-commerce business and would like guidance to ensure that you legally comply with the relevant regulations and protect your rights, schedule a meeting with a member of our team. We will help you develop a comprehensive strategy to protect you and your business.
[1] See South Dakota v. Wayfair, Inc., 585 U.S. __ (2018).