Business Law Advisor

[#1]

Several small business owners recently asked:

"I am starting a website that advertises products sold by online retailers. I’m just an affiliate and will not be selling anything.  Do I need a business license?"

"I want to start an online store, do I need to register as a business?"

Moneymaking opportunities are plentiful on the Internet – from selling your old books on eBay to promoting products and services for online merchants, or becoming an online merchant yourself.

Below are a few common ways in which you can make money over the Internet and the tax and regulatory obligations tied to each:

Business or Hobby?

The nice thing about the Web is that you can dabble in e-commerce without spending a lot of time and money.  Many online entrepreneurs have fallen into their businesses through an online hobby or selling things around the house on eBay.  However you make money online, you have to pay taxes on your income.  So before you begin, make sure you read over the IRS' guide Business or Hobby? Answer Has Tax Implications, which will help you determine your tax obligations.

Affiliate Marketing

One of the most common ways in which individuals can earn money on the Web is through affiliate marketing. This is an arrangement where individual Web site owners receive a sales commission by promoting products and services of other companies.  

The vast majority of affiliate marketers are individuals looking to make some extra money or website owners who want to generate revenue from their site without selling products directly.  

So, let’s say you have set up a Web site that includes nothing but links to affiliate sites.  Affiliate marketing is comparable to being a commissioned sales person, as a result the money paid to you must be reported on your taxes as income.  Affiliate companies are required to send you an IRS 1099-MISC form (instructions) showing your earnings for the previous tax year by February 1.  You report your affiliate earnings on your federal taxes using 1040 Schedule C (instructions).

Opening an Online Store

The basic rules for starting a business also apply to those starting online businesses.  Whether you are using a marketplace like eBay or Etsy or starting your own Web site, you will need to make register your business with the approriate government agenices, and comply with regulations around privacy, advertising, and intellectual property.

Here’s a checklist of key regulatory requirements you’ll need to be aware of:

1.    Determine whether or not you need an Employer Identification Number (or EIN).  Generally, if you are in business for yourself, and do not employee anyone, you do not need an EIN.  Your social security number is your EIN.

2.    If you plan on operating a business under a different name than you own, you may need to register your trade name with your state or local government.  This form of registration is known as “doing business as” (dba) or fictitious name filing.

3.    Most small online merchants operate as a sole proprietor, which does not require any kind of special incorporation filing.  Other online store owners choose to form a limited liability company (LLC).  Forming an LLC helps protect your personal assets in case you are sued for products you sold.  In addition, you don’t pay taxes on your LLC.  Rather you report income and losses from your business on your personal tax return.

4.    Check your local government office, such as your city clerk’s office, to see if you need a permit or business license.  Most online merchants work from the comfort of their home.  However,  many city and county zoning and planning agencies require all home-based businesses to get a Home Occupation Permit.  New e-tailers often overlook this requirement since all the work is done online.  However, because you operate your business exclusively at home and over the Internet does not necessarily mean you are expempt from complying with local zoning regulations.

5.    Make sure you understand your federal, state and local tax obligations.   If you are operating your online business in a state that charges a sales tax; or levies a gross receipts or excise tax on businesses you may have to apply for a tax permit or otherwise register with your state revenue agency.

Online businesses are responsible for collecting state and local sales taxes from their customers when applicable, and paying these taxes to state and local revenue agencies. 

6.    Comply with online business regulations concerning privacy, advertising, and copyright.  Online business owners are required to take steps to protect the privacy of their customer’s personal information.  In addition, if you advertise your business online, you need to ensure you are making fair and truthful statements, and complying with all applicable SPAM regulations.

Remember, these are just the basics.  In future posts, we’ll explore some of these topics (e.g., sales taxes), and other issues (e.g. domain registration) in more depth. 

However you plan to earn money online – whether by helping others sell products or selling products yourself – you will need to pay taxes on your income and have some obligations to the government that should not be overlooked

Message Edited by BobK on 03-16-2009 04:41 PM

[#2]

Bob, this is an excellent intro!  Would you address service businesses at some point?  Having an online business that provides consulting, site building, etc., is becoming more and more common, especially with the ease of international communication.  Thanks.

MaryAnn
www.BusinessPlanMaster.com
Business Plans for Financing Your Business

[#3]

I did not understand at the expense of network
as taxable income of the affiliate?

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Message Edited by NicoleD on 09-30-2009 12:20 PM

[#4]

Wow. Excellent read. I just went to my state government's website, and filed for an LLC. I think i'm better of filing and having a registered business than trying to get under the radar. For all those thinking about registering, it's actually a REALLY simple process. Don't pay a lawyer, do it yourself.

Omer A.

MMORPG Site Owner

VG Alliance LLC

Message Edited by NicoleD on 09-30-2009 12:20 PM

[#5]

I think if you make any considerable sum of money online you need to pay your taxes. Report it as self employed income, or just form an LL.

John.

VPS Hosting

Small Business Web Host

Message Edited by NicoleD on 09-30-2009 12:21 PM

[#6]

Hi,

Well anyone might do business without having incorporated. You know that SSN or PTIN would be enough to receive payments. Of course it depends very much of the State law. Different states has different regulations when it comes to dot-com business. I've seen that there are very useful information in the "Finance & Taxes" section on the right, so it would be a good idea for anyone to spend some time there.

Alex

CEO, Host Color - Web Hosting Provider

Message Edited by NicoleD on 09-30-2009 12:22 PM

[#7]

Regardless of all the red tape you have to go through to set up an online business, the reduced cost of having a strictly online business(no need for a store front, etc.), when implemented properly can provide lots of ROI. - Pelican Cases

Message Edited by NicoleD on 09-30-2009 12:23 PM

[#8]

Bob

Thanks - it can be hard work operating a business online and getting the taxes right is important.

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[#9]

These days LLC's are the way to go in my opinion. Why take the risk?

Glass Pipes

Message Edited by NicoleD on 09-01-2009 05:58 PM

[#10]

Truth be told. I own a small business right now and it is all for internet stuff. its really easy to set up and everyone should do it. beat

Message Edited by NicoleD on 09-03-2009 08:58 AM

[#11]

Nowadays, it's easier to earn (make) money online via the Internet. Today the Internet business is getting more and more popular. Our society lives in the cyber space...

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Message Edited by NicoleD on 09-30-2009 12:23 PM

[#12]

I set up an LLC 2 years ago and made it has an S corp. Forgot the exact wording on how to do that but i can tell you , it saves alot on taxes, wish I would have done that alot sooner. 

Excellent article and would advise people looking to start online, do what it takes to get the proper license, set up, etc... bc if you dont, then you have a hobby and not a business. To me, its the first step.

[#13]

nice article! more about opening an online store please!

Can someone elaborate and expand on the following point though: 

"In addition, you don’t pay taxes on your LLC.  Rather you report income and losses from your business on your personal tax return."

what kind of taxes is an LLC exempt from? Will I need to obtain an ITIN to file the income genereted through my LLC?

Thanks 

[#14]

Hi,

What the advertising side of online business ?

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[#15]

jayonline - I suggest tax questions in the Loans, Grants, and Taxes dicussion board where it will be more visibile to people with expertise in this area.

[#16]

I am just starting a home based business, and I knew I should probably file a DBA, or Fictious Business Name, but I had no idea I should file anything else. Thanks for you information...

Sam

youhuge.com

[#17]

Very useful tips, the internet has so many opportunities that we don't even realise when they're starring us right in the face!

[#18]

Very useful indeed. Definitely need to get in on some of these opportunities. I've been in banking and checking financials, but maybe an internet side-gig would be a good idea. Gonna have to check out the monetary value of such an economic venture Great post, thanks!

[#19]

This post has been moved because of irrelevant content.

[#20]

While making money on the Internet is still not impossible despite the clutter of  sellers, I think the biggest concern today for a virtual small business is one of theft of earnings and intellectual property. While promoting one's business is a big part of creating an Internet presence, safeguarding virtual assets is equally demanding, time consuming and expensive
Janiye
Blogger and Internet Small Business Owner

http://howtoblogformoney.net