Setting up your business means paperwork, no matter what you do or how badly you’d like to get out of it.
Especially if it’s your first time running your business, it’s not easy to know which business licenses and permits to have. Or if you even need them.
Before we go any further, why not check our ultimate guide to eCommerce?
Now, back to business: Should I have a seller’s permit? Do I need a business license to sell online?
Tip 💁 – Read the eBook ⬆️
TL;DR: 🤦♀️Yes, you will need a business license to legally sell anything on your eCommerce website. And in some cases, you’ll need a seller’s permit too.
What is a business license?
A business license is a formal permission to do business in your chosen field, granted by federal or state authorities.
Editor’s note 📝 – All entrepreneurs and businesses in the US must have a business license. The fact that you operate your business online or have a brick-and-mortar store doesn’t make a difference.
In general, a licensing system helps both the federal and the state governments to keep an eye on all the business sectors and collect the correct business taxes.
For example, if there were no licensing at all, anyone could sell products like tobacco and alcohol. And no one could guarantee that the products are legitimate and not harmful to humans.
This is why business licenses exist.
They help to regulate the market and ensure everyone is playing by the same rules.
Get recognized as a strong brand
Yes, we get it – just thinking about taxes, permits, and regulations bore someone to death.
But knowing which licenses and permits you need is just as important as picking the niche and industry for your business.
Like we already mentioned, the licensing system is also used to regulate a particular industry and, in some cases, to preserve and promote responsible environmental practices.
And this could work in your favor.
For example, an online fishmonger that has a business license issued by the federal fishing and wildlife commission can boost both its branding and credibility compared to other, unlicensed vendors.
You want to put your best foot forward when it comes to your small business, don’t you?
Risks of not having a business license
Even if your eCommerce store doesn’t have a physical location, the types of licenses you will need to get depend on what you’re selling.
Do you not think of eCommerce as being in the same category as traditional shops? It’s all just pixels and source code, right?
There are some big downsides to taking a risk and not getting a business license when you’re obligated to.
eCommerce is big money, but if you don’t do your research properly, you could end up paying some hefty fines. And that’s not even the worst-case scenario.
Let’s imagine you’re a big fan of Italian wines and want to set up an online wine import store.
While you’re deciding on your logo, you should also get in touch with the Alcohol and Tobacco Tax and Trade Bureau to get a federal permit for your business.
If you don’t and start importing your Italian wines anyway, you could face a huge fine that will bankrupt you and/or you’ll even have to close down your online store.
How to get a business license
Here’s the good news: it’s far easier to get a business license than you think.
In general, depending on the type of license, the application process can take anywhere from a few days to a few weeks.
Tip 💁 – Many governmental bodies have an online application portal, but you can also make an appointment with an advisor and fill in your application in person.
The costs depend on the issuing federal agency or state, and can vary from around $50 to a few hundred dollars.
Whichever way you look at it, it’s a small price to pay for credibility and a legal permission to run your business.
But why do I need a business license?
If you want to operate a legal business, you need to have a business license.
Having a business license will make your business look reputable and trustworthy to both business partners and customers alike.
It’ll also help you to prove to your customers that your products are safe to use and do what they say on the tin.
Proper online business licensing also certifies that you’re taking your business seriously and are not cutting any corners.
Finally, having the correct paperwork in place will also help you navigate the world of business tax easier.
With the right business licenses and permits, and a good accountant, you could potentially end up saving some of those tax dollars each year.
Think of it as the government saying thanks for playing by the rules.
Different types of licenses
In the US, business licenses are granted by the federal government or the local state or city government.
Whether you need a state license on top of a federal license for your online business depends completely on the types of products or services that you’re selling.
Federal licenses are usually required if you’re dealing with heavily regulated products. These licenses generally cover items like:
- Animal products
You need to be directly in touch with the relevant federal agencies to apply for your license. The agencies also set their respective license fees, so remember to read the small print.
State licenses, on the other hand, vary from state to state, and are more focused towards occupations and certain products.
For example, plumbers and auctioneers need to get licenses for the states they are operating in.
Bear in mind that the fees for state licenses can vary from state to state, and sometimes the difference can be hundreds of dollars.
Some licenses and permits expire after a certain time period, and you risk fines or penalties on your business income if you don’t renew them on time.
There might also be particular city regulations that apply to your products.
If you want to set up an online sweet shop, you might have to get a hygiene certification yourself and have local authorities certify your kitchen as a safe place to make sweets for commercial consumption.
To get an idea of which licenses you may need for your online store, start by:
- Finding out which local authorities are responsible for business permits and taxes in your city or state – a simple Google search should get you there
- Booking an appointment or reading up on the application process online
- Making sure you have a clear understanding of the time frame of getting your license application approved to avoid trouble
Since each business license differs, make sure you’re well informed about your field.
And remember, there’s no shame in asking the officials seemingly stupid questions. You want to be as informed as you can be.
What is a seller’s permit?
If you want to sell anything, you will need a seller’s permit.
Also called a sales tax license or the state tax ID number, state governments issue these permits to make the collection, reporting, and paying of sales taxes easier for everyone.
Tip 💁 – Depending on the state, you might be able to benefit from annual tax-free allowances on your business income. This means that if your online sales fall under the threshold amount, you might be able to not pay sales taxes.
Pretty sweet, right?
What’s the difference between a seller’s permit and a business license?
Basically, a business license allows you to run your business legitimately and costs money to get. A seller’s permit, on the other hand, is needed to collect sales tax as part of your sales but is free.
So, in order to run a successful business, you need to have both a business license and a seller’s permit.
The case of the nexus
If your home state for your business is different from where you store your inventory, you might be required to get the correct seller’s permits and licenses for both states.
This is called nexus in the world of business and tax.
A nexus is defined as a ‘sufficient physical presence’ in another state, according to the regulations.
And keeping your inventory in a different state to your registered address unfortunately qualifies as ‘sufficient physical presence’.
So, if you run your business as a home occupation from Minnesota, but store your t-shirt stock with a print on demand partner in California, you’ll find yourself in a nexus kind of situation.
One way to get around not being out of pocket is to take some time to research which states require a seller’s permit.
Iowa, for example, doesn’t require individuals who use online marketplaces to register for a seller’s permit.
What do you need to apply for a seller’s permit?
Before you apply for a seller’s permit, make sure you have these at hand:
- Business tax IDs. Your business tax ID is sometimes called the employer ID (EIN), even if you don’t have any employees. You can apply for the federal EIN online, but might need a state EIN too, in some cases.
- NAICS code. This code is part of the system the US uses to differentiate between different businesses and what they sell.
- Information about your business. You usually have to tell the state what type of business you have (sole proprietorship or a limited liability company), when you set up your business, as well as some basic information about your business bank account.
Can I just get a seller’s permit or a business license?
Since seller’s permits are free, it might be tempting to ditch other licenses altogether.
But don’t do that. Rather, treat seller’s permits as sales tax IDs. They do not make up for having proper permissions and certificates to do business in your chosen field.
A seller’s permit confirms that you can collect tax from your end customer.
A business license, on the other hand, proves that:
- You are qualified to do business in your field
- The products you sell are safe.
- Your business follows the rules – nobody wants to be called a fraud
The better you understand the playing field, the easier it will be to grow and scale your business in the future.
A business license builds credibility
Don’t be that person who cuts corners – you’ll only earn yourself a questionable reputation. Instead, build a small business that you are proud to take the credit for.
Take the time to understand exactly what licenses and permits your business needs.
It will save you time and money in the long run and once you know what to do, you’ll be all the wiser the next time you need to renew your permits.
Editor’s note 📝 – If you’re not operating a business in the US, you should check with your local authorities which permits you need in order to run your online business.
Some countries, like the UK, don’t require a business license, while other states might not even allow online sales in certain industries due to a government monopoly (lottery sales in Finland, for example).