The rise of the Internet and eCommerce has increasingly lowered the barrier-to-entry for entrepreneurship. Get a domain, throw together a website, and away you go, right?
Wrong. While it may seem simple, an online business is still a business, with all the headaches over taxes, liabilities, customer service, and security. Here are five things you should consider closely before opening your virtual doors:
1. Business structure: Should you incorporate?
For any business, the owner needs to consider whether or not to incorporate. Incorporation is not required, particularly for a small, single-person operation (and even some partnerships), but incorporation does help shield the owner from any personal liability related to the business. In other words, if you incorporate the business, your personal assets – your house, bank accounts, and investments – are not at risk if the business goes into debt.
Many people think of “corporations” as businesses with hundreds or thousands of employees, and that is true of many traditional “C-corps.” Another form of incorporation, known as an “S-corporation”, is a good alternative for small businesses, as it eliminates many of the complex administrative and legal requirements imposed on C-corps. Also unlike a C-corp, the profits and losses of an S-corp “pass through” to you personally. This means that that company profits aren’t taxed twice—once at the corporate level and again at the shareholder level—which is what happens to C-corp profits.
Another attractive option is to form a limited liability company (LLC). As the name implies, an LLC provides the limited liability features of a corporation, so your personal assets are shielded from the business’s obligations. As with an S-corp, the profits of an LLC pass through to you, so you avoid double-taxation. There are, however, several differences between an LLC and an S-corp, perhaps the most important being that LLCs have less onerous requirements in terms of administration and recordkeeping.
Business owners will need to research which structure best suits their needs. The U.S. Small Business Administration (SBA) is a great resource for basic information on the different types of business structures. You’ll probably also want to consult a business attorney or take advantage of economical legal services to set up the structure appropriate for your online venture.
2. Taxes: The ones you have to pay and the ones you have to collect
Just like individual taxes, the taxes for a business can get complicated very quickly. The IRS Small Business and Self-Employed Tax Center pulls together documents and regulations for businesses with assets of less than $10 million, including an area dedicated to one particularly popular type of online business: online auction sellers. Federal tax obligations could include: corporate income tax, personal income taxes for owners & partners, and employment taxes (if the business has any employees). Furthermore, states have their own requirements for business and employment taxes.
Paying taxes is only part of the equation. Businesses may be required to collect state sales taxes as well, even if the business is exclusively online. Each state maintains its own guidelines about how and when those taxes must be collected. An online business must collect sales taxes for any state in which that business has a physical presence, not where the customer has a physical presence. Again, the SBA is a great resource for basic information and also links to individual state requirements.
3. Home Office: Is your home office really a “home office”?
As a business owner, you’ll want to take advantage of as many tax deductions as possible, and the home office deduction seems perfect for an online business, right?
Not so fast. The IRS is very specific about what does and does not qualify as a tax-deductible home office. There are two basic requirements: first, the space must be for the regular and exclusive use of the business. In other words, it has to be a dedicated space, like an office, that is used only for the business. It may not be a shared office or the nook of a family room. Second, it must be the principal place of business, where most decision and action happens. For most online businesses, this second exception won’t be a problem, but that first requirement might cause confusion.
4. Insurance: Don’t think your homeowners’ policy will solve every problem
You might think that your homeowners’ insurance policy will cover any liabilities of a home-based online business. Think again. Ryan Hanley, an insurance agent at the Murray Group in Albany, New York, discussed this in a piece for Entrepreneur, “People do not realize that if the UPS guy comes to your door with a business package in his hand and slips and hurts himself, there is no coverage for that injury in their homeowner's policy.”
Other insurance concerns? Loss of inventory/assets, product liability, or complaints based on errors/omissions. If your business is truly bite-sized, these may be handled with a rider to your existing homeowner's’ policy. Otherwise, you’d need a business-specific insurance policy. Doing an insurance audit and getting advice from a qualified insurance professional should definitely be on the business owner’s checklist.
5. IT: Security and spam
Live by the sword and die by the sword, or, live by the Internet and die by the Internet. If your business is based totally online, then cyber security has to be a major priority. Credibility with customers can be permanently ruined if their personal information is compromised. Similarly, internal business operations like: accounts receivable and payable, inventory management systems, and customer service systems must be protected. All online businesses should invest serious time and money to secure their IT systems.
In addition to security, online businesses owners need to be savvy about online marketing laws and requirements. Particular attention should be paid to email communications with customers. The CAN-SPAM law outlines the requirements for commercial email and imposes tough penalties for violations. It mandates that commercial emails be clearly identified as such and prohibits the use of misleading headers or subject lines. CAN-SPAM also requires you to provide a clear pathway for recipients to unsubscribe and that you handle those unsubscribe requests promptly. Penalties for violations can run as high as $16,000 per occurrence. Those fines could sink an online startup, so it’s wise to consider a service like Weebly Promote that already accounts for these regulations.