Someone recently reached out to ask me:
Do I need a business license to sell online?
The simple answer to that question, is no in most cases. You do not need a business license to sell online unless your state or local government requires it. In our experience, they usually do not for most product types.
But that doesn’t really tell the whole story, because many people who are asking this question are really saying:
I’m worried about all the paperwork, what do I have to do and what can I get away with not doing right now? Help me make sure I don’t make a huge mistake when I’m getting started.
If this is why you are here, keep reading. In this post, I’m going to attempt to break down all the legal and paperwork concerns you may have (or should have) when starting an online selling business.
Before going any further, I’d like to make it clear that I am not a lawyer or a tax professional, and I am not providing legal or tax advice.
With that in mind, let’s start with the question that probably led you here.
Do you need a business license to sell on Amazon?
No. A business license is usually not required to sell on Amazon. They will not ask you for one before setting up your seller account.
(If you are new to selling on Amazon, make sure you check out this guide on how to get started on Amazon without debt.)
For that matter, a business license usually isn’t required to sell on any of the following marketplaces:
- Amazon
- eBay
- Craigslist
- Etsy
Even if you start your own storefront using Shopify, Wordpress, or something similar, you usually don’t need a business license.
I’m including the word usually for a reason – this issue can vary based on where you live. Any state or local government could decide to require a license to sell online, and you should check with your before moving forward.
This also will vary a bit depending on the types of products you sell. Most products won’t require a license, but if you’re selling alcohol, tobacco, firearm products, or anything like that the chances of needing a license are much higher.
Even if you think that a license won’t be required, you should still do a few searches to confirm.
To get started, try searching in Google for the following:
- <your city/township/county> + business license
- <your state> + business license
For example here’s what I find through the state of Minnesota’s website:
When you start looking into it, you’ll likely find a long list of businesses that do require a business license. At this point, it’s useful to understand what a business license is for…
What is a business license for?
Business licenses are usually required by the government when the industry you are in carries some increased risk. This can mean an increased risk to the consumer, an increased risk to the public, or even just an increased risk of fraud.
In these situations, the government likes to keep tabs on who is doing what and often times make sure they have the proper credentials as well. In these situations, you need a business license.
None of this applies to selling online. The only reason this would change is if you are selling a product that requires a license like alcohol or firearms – but in that case it is not selling online that makes you need the license, it’s selling the specific product.
If you want to review types of businesses that do require a license, check out this list on the SBA website.
Local Licenses
When you get down to the local level – we’re talking cities, townships, and counties – there’s a much higher chance of your government requiring some sort of “business license” regardless of what industry you are in.
Some towns just have a catchall home-based business license that you may need to apply for.
If you find out your local area requires a license and choose to comply, these are usually quick and painless to set up.
You Probably Need to register for sales tax in your home state…
Now that we’ve covered business licenses, let’s talk about something that many sellers do need from the beginning, registering for a sales tax ID in their home state. The name of this process varies by state, but in some states it’s called a seller’s permit, other states call it a resale certificate, and there will be some other names as well.
The exact name of the “seller’s permit” varies by state, but the purpose is always the same:
A seller’s permit or resale certificate is what allows you to collect sales tax.
There usually aren’t any fees associated with getting this permit. (You’ll be paying them plenty of money in taxes, don’t worry.)
The seller’s permit is generally required by any state you have a “nexus” in. This used to primarily mean states where you have a physical presence, but this has been changing rapidly. Recent supreme court cases and law updates have led to many states considering something referred to as an “economic nexus” when deciding whether or not you are required to get a permit and submit the taxes.
In many states, this economic nexus doesn’t kick in until you are selling over $100,000 worth of goods or services in their state.
Tax ID Number
When you go to set up your seller’s permit, they will also ask for a tax ID number.
Some states will allow you to use your social security number if you are a sole proprietor.
Other states will ask for your EIN, which is something you can register for through the IRS.
There is a difference between state and federal tax ID numbers. When you need one, you probably need the other but that is not always the case. When you walk through the process of registering with your state to collect tax, you’ll know if they require you to have an EIN or not.
These numbers are essentially a way for the government to keep track of your business and the taxes owed by you and any employees you may have now or in the future.
One Last Thing: LLCs & Incorporation
A discussion on these topics wouldn’t be complete if we didn’t address the topic of LLCs and business entities.
An LLC is a legal entity you form that separates you from your business.
When you are a sole proprietor, you and your business are one and the same for legal and tax purposes.
If you are a sole proprietor and someone wants to sue your business, your personal assets can get wrapped up in all that. With a properly operated LLC, your personal assets are protected in the event of legal proceedings against the business.
You can read about how I eventually decided to set up my business in this post from 2014. While it’s an older post, it will give you an idea of what I was thinking about when I was in your shoes and just starting out.
If you want to learn more about my journey from being a new seller to hitting 7 figures and beyond, another good post to check out is this look back on 5 years of selling online full-time from 2018.
What I Would Do Next
First things first – don’t let all this overwhelm you.
While it all seems complicated, the truth is that you could have it all sorted out in an hour or less.
This is no where near as a big of a barrier as some people think.
Here is the order I would approach everything in if I were starting from scratch.
- Decide if I wanted to start with an LLC or wait to validate the business more. (If waiting on LLC, skip to #4.)
- Set up the LLC.
- Register for state and federal tax numbers.
- Set up the seller’s permit for my state.
- Research additional permits or licenses I may need on the local or state levels.
- Write up a summary of what I did, send it to a few different people with authority on the subject, and ask if they see any problems.
Let me reiterate: none of this is meant to be legal or tax advice for your situation. This is what I personally would do based on what I’ve learned over the past decade selling online. My experiences are unique to where I live, what I do, and how my business evolved. I share them to give you a starting point for your own research.
If at any point you are unsure of what to do next, consulting a professional lawyer or CPA can be an invaluable investment.
Share your questions and experiences below…
This was just a primer on the subject of the business set up steps for selling online. My goal was to give an overview of the important things to be thinking about without overwhelming new sellers with more information than they can handle.
If you think that a missed something or need to explain something in more detail, let me know in the comments. I’d also like to hear about your own experiences getting set up, or even what your plan of attack will be moving forward. If you uncover any strange, frustrating, or otherwise noteworthy laws as you go through this process, share those as well.