Online shopping has soared in popularity, but that doesn’t mean that brick-and-mortar retail stores are redundant or that all business ideas work well online. In fact, the BizFilings Small Business Survey 2021 found that 38% of entrepreneurs have chosen to run their business strictly as a brick-and-mortar operation compared to 37% who run their business both online and offline. A quarter (25%) of respondents said they do business solely online.
Regardless of whether your business is physical or virtual, you will likely encounter compliance considerations. In this article, we focus on two of the most important: business licenses and taxes.
What types of licenses, permits, and filings does a business commonly need?
Most small businesses need a combination of licenses and permits from both federal and state agencies. The requirements – and fees – vary based on your business activities, location, and government rules.
Here’s a list of some of the more common licensing requirements:
- Basic business operation license – This is a license from the city in which your business operates or local county (if your business is located outside the city’s legal boundaries).
- DBA/fictitious business name registration – A “doing business as” (DBA) or fictitious business name registration is filed with the appropriate state or local jurisdiction. To help you with this process, BizFilings can prepare and file DBA registrations for businesses in all 50 states. Learn more.
- Home occupation permit – Some local governments require a home-based business to obtain a home occupation permit.
- Zoning and land use permits – A zoning and land use permit is typically used to ensure that the land use of the planned development is consistent with local zoning laws. Local government zoning laws vary from state to state and even among municipalities.
- Building permits – If you plan on remodeling or building a commercial space, you’ll need to get a building permit.
- Health department permit – Required if your business is involved in food preparation or the sale of food.
- Fire and police department permits – If your business attracts large amounts of customers (i.e., nightclubs and bars), then you’ll need to obtain the appropriate permit.
- Alarm permits – These permits are required for businesses that have an alarm system that is connected to a monitoring service.
- Special state-issued business licenses or permits – Required if your business sells liquor, lottery tickets, gasoline, or firearms.
- Special state-issued occupational licenses – If your business specializes in state-regulated services such as medical care, auto repair, real estate sales, tax services, insurance sales, cosmetology, and legal representation you’ll need a state-issued occupational license. Note: This is in addition to a professional license issued to individuals practicing in these fields.
Are online businesses exempt from business license requirements?
There is a perception among many entrepreneurs that online businesses are less formal and therefore not regulated in the same way as businesses with physical locations. In reality, e-commerce businesses must follow similar legal requirements as brick-and-mortar businesses. License and permits are intended to protect consumers and employees and in the eyes of the government. It doesn’t matter if your business is conducted primarily or entirely online.
If you do business online, you may be required to obtain the following licenses and permits:
- General business license
- DBA or fictitious name registration
- Professional and trade licenses
- Health inspection certificates
- Home occupation permit
- Weights and measures registration
For more information, read: Do I need a business license for an online business?
State tax requirements
Moving onto taxes. State tax requirements can vary by state and the structure of your business. Be sure to check with your state and local government to understand your business tax obligations. Both online and offline businesses will typically need to comply with the following:
- Pay franchise tax
- Pay state corporate income taxes (if your company is a separate taxable entity)
- Collect and remit state taxes (if required)
- If your business has employees, you must withhold and pay state employment taxes
Federal tax requirements
Federal tax regulations apply to both brick-and-mortar and e-commerce businesses. Steps you must take to ensure compliance include:
- Obtain your Federal Tax ID (EIN)
- If you want your company to be taxed as an S Corporation, you must file Form 2553 with the IRS
- If you want to change the way your LLC is taxed for federal income tax purposes, you must file Form 8832 “Entity Classification Election” with the IRS
- File federal corporate income taxes (if your company is a separate taxable entity)
- File an information report (If your company is a passthrough entity and does not pay income taxes)
- If your business has employees, you’ll be responsible for withholding and paying employment taxes
- Make sure you have complied with securities laws if you are selling interests to the public
Wayfair and online businesses
In 2018, the U.S. Supreme Court ruled in the South Dakota v. Wayfair, Inc. case that states can require out-of-state retailers to collect sales taxes from in-state customers, even if the retailers have no physical presence in the states.
The ruling overturned previous U.S. Supreme Court decisions holding that the Commerce Clause of the U.S. Constitution required a physical nexus between a state and an out-of-state seller. Instead, the Wayfair Court held that an economic nexus was sufficient.
There are 45 states, plus the District of Columbia, that impose a sales tax. Back in June of 2018, only a small handful had an economic nexus sales tax law.
If you do business online, check the sales tax requirements in the states where you sell products and services. What constitutes an economic presence can vary by state.
Find out what’s on the minds of small business owners and the challenges they face when establishing their business, adjusting to the pandemic, keeping pace with regulations, and more. Check out key findings and insights from the BizFilings Small Business Survey 2021.