An e-commerce website’s owner should take important steps when planning to buy or sell products and services on the internet. The following steps can help implement and protect your business when engaged in e-commerce transactions:
First, the e-commerce website owner should assess the market and find out what is missing. Or, evaluate what is being done in the industry and whether there is a better solution. Then, he or she should figure out a practical solution to the problem. For example, if there is a way to safely deliver medical supplies by using an online application, then the so-called “market gap” should be used as an opportunity.
Second, choose a business structure such as a corporation or limited liability company. Then, register the legal entity in a specific jurisdiction that makes sense for you. This step includes filing documents with a state agency that manages business filings and issues official certificates. Now, in most cases, small businesses register the legal entity in the state they’re physically located but it is not mandatory. In some cases, it may be pragmatic to register the legal entity in a different state – e.g., Nevada, Delaware – for legal or tax reasons. So, it is always best to speak with a legal and tax expert.
Third, choose the business name and register a domain name using a domain registrar (e.g., GoDaddy, Dynadot, Hover). The business name should be indicative of your business operations and the products and services being offered to customers. For example, if your company’s name is Amazon, Inc., then it would be practical to register amazon.com as the domain name. The pre-designated name should help uniquely identify the business and avoid confusion in the market. In other words, you should avoid any kind of intellectual property violations – e.g., trademark infringement. In addition, you should setup webhosting with the same domain registrar, if possible. This way, it can design the website and host it on its servers. You should find out what steps the webhosting company takes to safeguard your website and its content – i.e., whether it uses encryption or secure socket layer. Thereafter, you should start promoting the website by implementing search engine optimization or other marketing strategies (e.g., pay-per-click, social media marketing, email marketing).
Fourth, setup the financial accounts and records. Initially, you should get a federal Tax Identification Number (“TIN”) or Employer Identification Number (“EIN”) from the Internal Revenue Service. This way, your business entity can be properly identified in the government’s system. You may be able to utilize your social security number if you plan to operate as a sole proprietor or single-member limited liability company. You should open a business bank account and setup e-commerce payment services. There are several options you can choose from such as PayPal, Venmo, or other merchant service accounts.
Fifth, you should review, evaluate, and understand sales tax and licensing requirements. E-commerce websites were required to collect and pay sales tax in the state where they had a physical presence. However, in South Dakota v. Wayfair, Inc., the Supreme Court overturned the physical presence requirement. Accordingly, California and other states have updated their internet sales laws. As of April 1, 2019, any out-of-state retailer (i.e., remote sellers) must register with the California Department of Tax and Fee Administration (“CDTFA”) and collect sales tax if it sells more than $500,000 in tangible goods for delivery. Also, local retailers that have a physical presence in California, must register with the CDTFA and comply with its guidelines. Physical presence can be established if the retailer has: (1) offices in this state; (2) representatives in this state who take orders, make calls, or deliver tangible personal properties; or (3) equipment in this state - e.g., computers, servers, or machines. This step is somewhat complicated because the laws in each state may be different so it’s always recommended to contact the state taxation department and speak with a qualified tax expert. In addition, you should contact your local city/county agency to determine whether you need a business license.
Sixth, you should locate, identify, and protect your intellectual property. For example, if you have a new and useful process, machine, manufacture, or composition, then you should consider filing a patent application. If you have a unique product name, symbol, or design, then you should consider registering a trademark. If you have unique literature, music, videos, or photographs, then you should consider filing a copyright application.
It's important to know your legal rights and responsibilities when it comes to setting up an e-commerce website for online transactions. Please contact our law firm to speak with a knowledgeable e-commerce attorney at your convenience.