How To Start An Online Shop: The Importance of Forethought
Ensure the legality and longevity of your online business.
If you have a creative passion or hobby, odds are, you’ve likely considered seeing if you could turn a profit from it at least a time or two. And it’s worth the consideration - neither this business nor Paige Hulse Law would have come into existence without asking that question.
Having a deeper connection with your creative craft is shared among so many of us in the creative community, which is why selling your craft or creative services, especially in a convenient and global online storefront, is so intriguing.
However, if you don’t plan and ensure the legality of your online shop, your online business is at risk of losing you money and breaking some laws. Being prepared is vital to making your passion a realistic business endeavor. In this blog, you’ll be armed with the resources and knowledge to start your creative shop on the right foot, legally.
First, ask: What’s your passion? Can you sell it?
Before brainstorming domain names or creating a formal business model, you need to evaluate (and re-evaluate) what inspired your online business. Deciding what exactly you want to sell in your online shop is the foundation of your business plan. Are you a photographer looking to sell your unique talents in the form of services to clients? Or maybe you want to sell your unique ceramics and artwork. Whichever it is, these details will be important later down the line while creating a formal business model. Defining the uniqueness and value of your art is difficult, but necessary to make sure your business is financially sustainable.
Before you can plan how to run your online shop, you need to know
how to start your business legally
In short, there are nine steps to ensuring your business’s legality:
Step One:
Run a detailed name search
Most new business owners do conduct a name search, but not nearly as thoroughly as they should.
What most new shop owners do is check if their desired domain name and social media handles are free, and if they are, celebrate and move forward.
What they need to do however is a proper legal due diligence search.
For a number of the steps on this list, you’ll be able to complete them yourself. For this step, however, we recommend having a lawyer complete this.
Why?
You don’t want your new brand name to run the risk of “likelihood of confusion” with another brand. A “likelihood of confusion” doesn’t just mean the exact same name - it just needs to be “confusingly similar” to the consumer…and lawyers can have a lot of fun with cease and desist letters in that grey area. So a lawyer is the best person to help you, as they have a better understanding of the type of argument the opposing council might create down the road about your possibly confusingly similar name.
Whether you decide to register a trademark after the due diligence search is your decision as a business owner, and quite frankly, besides the point. The point: do not try to build a business that you will have to tear down immediately due to intellectual property disputes, or claims that your brand infringes upon another’s.
Run a sufficient due diligence search before you invest any money into creating a brand. And finally, make sure you’re working with designers, copywriters, and coaches who know enough to tell you the same.
So how do you complete this first step? Find a lawyer who runs due diligence searches and ask them to run one for your new name. This lawyer does not need to be in your state because this falls under federal law.
Step Two:
Get all applicable licenses and permits
For selling items in certain industries, a license or permit may be required. For example, if you’re selling any cannabis products, there are certain licenses and permits needed in order to legally sell those products.
So the next step you’ll want to take is to research if there are any relevant licenses or permits required in your state for the types of products you’ll be selling.
In order to check the required licenses and permits, check with the Small Business Association in your county or state. Some SBAs will have this information on their website, other times you’ll need to give them a call to tell them about what you’re planning to sell and inquire that way.
Step Three:
Invest in the right contracts
There are some essential contracts and legal documents you’ll need to operate your new online shop. We’ll outline the three you’ll definitely need here as well as link you over to our shop where you may purchase these attorney-drafted documents.
Contract #1: A Privacy Policy
If you’re collecting any information on your site users, you must have a privacy policy. “Must” meaning it’s federal law. Additionally, the newly-mandated California Consumer Privacy Act and GDPR laws also require you to have a privacy policy anywhere you’re collecting “personal data.”
The most common legal issue we see with creative business owners is the violation of federal law by failing to include a privacy policy on their website.
Wondering if you’re collecting personal data? You are and need a privacy policy if you do any of the following:
Have Google Analytics or another analytics tracking software installed
Collect email addresses via a newsletter or opt-in gifts or lead magnets
Make sales on your site (digital & physical products, services, gift cards, etc.)
If you’re doing any of the above, you must have the foundational level of protection via a privacy policy.
Contract #2: Website Terms & Conditions
Terms and Conditions are one of the foundational elements of your website - it’s a contract between you and the user of your site. While not a federal requirement, we make sure all of our clients have a Terms and Conditions on their website. If you don’t have a website Terms & Conditions (the agreement that governs how your website visitors may and may not use your website,) you’re leaving your site content wide open to copycats to have a field day.
A Website Terms & Conditions policy is your best line of defense against copycats and other common website issues.
Contract #3: Terms & Conditions of Online Sale
This Terms & Conditions of Online Sale covers very different topics than the above-mentioned, more general Website Terms & Conditions. The Terms & Conditions of online sale is a separate document that customers must agree to before purchasing a product, which will lay out topics such as your return policy, risk of loss provisions, all disclaimed and implied warranties, and more.
Having a detailed Terms of Purchase (aka Terms of Sale) is vital for any online shop, and most online shop owners usually include this section. However, you may be missing a Risk of loss (it may be phrased as “risk of transit” or something similar). A risk of loss details who is responsible for the damages of an item-- and the associated cost of replacing the damaged item-- after it leaves the manufacturer's hands. That means that in any form of transit from your hands, until the item arrives at your client’s mailing address, someone must be held accountable.
If this provision is left out or improperly drafted, and one of your items is broken, lost, or stolen during its transit, you could be left in the awkward situation of having to fight with your client over who has to pay for what. A detailed, properly drafted, and thorough risk of loss provision is essential to the legality of your business, and the longevity of your and your clients’ relationships.
Optional: Purchase all 3 together in the Online Shop Bundle
If you’re in need of all 3 contracts mentioned above, we also have a bundle option where you may purchase all 3 together and save in the process with special bundle pricing.
Contracts mentioned:
Step Four:
File an LLC
A limited liability company (LLC) is a business entity that provides enhanced liability protection for the business owner, and the tax benefit of a partnership. Your LLC is created and governed by your specific state’s law, and it can have one owner or multiple owners.
There is one specific reason why an LLC is the most popular business entity for creatives: an LLC separates your personal assets from your business assets. If you only have a DBA (Doing Business As) instead, there isn’t any separation. That means if you’re sued for anything involving your business, a court could allocate your personal assets to pay damages.
One of the most common questions we get asked is if you need a lawyer to form your LLC, or if you can do it yourself, and the answer may surprise you. You can actually do most of this yourself. Let us explain…
There are three main steps to sufficiently forming your LLC:
Step 1: Filing your articles of organization with your state
Step 2: Opening your business bank account
Step 3: Drafting an operating agreement.
You don’t technically need a lawyer for steps 1 & 2.
LLCs are formed when you file the proper paperwork with your state - typically called the “Articles of Organization”. The form is simple enough, and if you know the answers to certain questions, you don’t need a lawyer to help you do it.
Wondering what an operating agreement is? It’s basically the “contract” that will govern your LLC.
They’re actually not required in every state, but most banks will require that you have one in order to open a business bank account. The operating agreement will set forth how distributions and losses are shared, how the LLC is managed and taxed, how members can sell or replace shares, etc. Are you unsure if you’re going to add new members to your business someday? Your operating agreement, if written correctly, will cover all of this. How can your LLC be dissolved, restructured, or “wound up?”
The language that you use in your operating agreement is imperative: if your LLC is involved in litigation, it will be considered an enforceable contract by the court.
There’s another reason why an operating agreement is imperative - it will protect you from something called “piercing the corporate veil”, which single-member businesses, in particular, are highly susceptible to. Your operating agreement should never be a simple, flimsy document.
So for steps 1 and 2, they may be done yourself, but for step 3 we recommend getting an attorney-drafted operating agreement. That could mean working with a lawyer 1:1 and paying their hourly rate for them to draft your operating agreement, or the way we suggest is to purchase an attorney-drafted operating agreement. This gives you the protection of a document written by a lawyer, without having to pay the expensive hourly rate.
You can find LLC Operating agreements available in our shop. There are two agreements to choose between, and it depends on how many members will be part of your LLC. If the LLC will just have you forming the business, get the Single Member Operating Agreement, if you’re starting the business with one or multiple partners, get the Multi-Member Operating Agreement.
Pro Tip: you will need to file articles of renewal on the Secretary of States website on the anniversary date of when you started your business. Use our legal annual planning guide to make sure you have your yearly tasks covered.
Contracts mentioned:
Step Five:
File for your ein number
An EIN Number is like an SSN but for your business. Think of it as the Tax ID that the government keeps track of your business by.
Getting an EIN is a very simple process, simply head to IRS.gov, complete the steps and you’ll be the proud new owner of an EIN number in under 5 minutes. Simply complete the form, and you’ll automatically receive your new EIN as a digital download that may be used right away.
One question we get often is “Do I need an LLC to get an EIN?” The answer is you don’t need an LLC to file for an EIN, however, because of all the points mentioned above about separating yourself from your business for liability purposes, we still suggest you start an LLC anyways.
Step Six:
Open a business bank account
Once your LLC is open and you have your EIN it’s time to open a business bank account.
This is absolutely vital for two reasons.
1: In order to make use of the limited liability which an LLC affords you, you need to keep your personal & business assets separate. If you don’t, a judge could see your LLC as a sham and then still dip into your personal assets to settle a business judgment.
2: As any business owner who’s filed their taxes can tell you, doing your accounting will be just about impossible with personal and business finances mixed together in the same accounts. So from a practical bookkeeping & accounting perspective, you’ll want separate bank accounts.
You may head to any bank you wish to open a business account. Be sure to bring along your LLC Operating agreement mentioned above and your EIN.
Step Seven:
Check insurance requirements
What type of insurance you need will depend upon how much risk there is in your business, what you’re selling, how you’re selling it, etc. So it’s worth meeting with an insurance broker or financial advisor, telling them about your business, and having them help you in determining which insurance your new shop business needs.
One policy that we find every business owner needs is a general umbrella policy, such as General Liability Insurance.
Step Eight:
Make sure your website is legal
If you successfully completed step 3, invest in the right contracts, you’ll actually have completed most of this step.
To ensure your website is legal, you need a Privacy Policy as mentioned before.
Depending on your industry, it might also be worth having a disclaimer on your site. How do you know if your industry needs a disclaimer? If your industry is covered by a professional license, for example, legal, tax, finance, or health, you’ll want a disclaimer.
(You may see an example of a disclaimer in the footer of this website.)
To have a disclaimer written that fits your specific business, talk to a lawyer in your state.
Want to learn everything our founder and lead-shop attorney wish business owners knew when starting out? Check out our most comprehensive resource: The Legal Foundations A-Z Course Bundle.
Step Nine:
Register your copyright/trademark
Let’s talk about the difference between copyrights and trademarks and determine if you need to register any, one, or both of them.
You’ll want to register a copyright if you have created a work of authorship that’s protectable under the Copyright Office, such as if you’re a photographer selling high-end art prints.
You’ll want to register a trademark if you have a business name that’s anything other than your last name. The whole trademarking process takes between 6-12 months, so if you’re thinking of doing this, talk to a lawyer sooner rather than later. (We might be biased, but we recommend working with Paige Hulse, our lead shop attorney, who files trademarks for clients through her law firm.)
Why trademark right away? The risk is really of not having the trademark and someone else beating you to it. In that case, if they register the trademark, that would force you to rebrand or you could be sued for Intellectual Property infringement if your name is similar to that of another business owner who files a trademark first.
