How to Legally Start an Online Business

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I can’t tell you how many prospective clients come to me that are in the idea phase of starting their business. They think they need to talk to a marketing specialist, but there is so much to do “behind the scenes” before you are ready to market your business. If you are serious and ready to do the damn thing, you need to start with a strong foundation. Here is a quick rundown of everything you need to do to set your business up for success right out of the gate. 

Write a Business Plan

Start with writing a business plan. This will force you to get crystal clear on what your business stands for, how it will make money, who your competitors are, what your target market looks like, how much money you need to make, and what it is going to cost to stay in business. Yes, it is a long, tedious process, but it is so, so worth it. This will help you get off on the right foot and create a sense of confidence and direction. There is a fabulous (and free) business plan template you can get here. It provides instructions throughout the entire template. This is the first step in turning your brilliant idea into an actual, money making business.

Choose a Business Structure

Protect yourself and your business by choosing a legal business entity. This is an important decision because it will affect how your business operates and how it is taxed. Some common business entities are as follows:

• Sole Proprietorship
• General Partnership
• Limited Liability Partnership (LLP)
• Limited Liability Company (LLC)
• Corporation
• Nonprofit Corporation

Sole Proprietorship

A Sole Proprietorship is one individual or married couple in business alone. Sole proprietorships are the most common form of business structure. This type of business is simple to form and operate, and may enjoy greater flexibility of management, fewer legal controls, and fewer taxes. However, the business owner is personally liable for all debts incurred by the business.

General Partnership

A General Partnership is composed of 2 or more persons (usually not a married couple) who agree to contribute money, labor, or skill to a business. Each partner shares the profits, losses, and management of the business, and each partner is personally and equally liable for debts of the partnership. Formal terms of the partnership are usually contained in a written partnership agreement.

Limited Liability Partnership (LLP)

A Limited Partnership is composed of one or more general partners and one or more limited partners. The general partners manage the business and share fully in its profits and losses. Limited partners share in the profits of the business, but their losses are limited to the extent of their investment. Limited partners are usually not involved in the day-to-day operations of the business. Filing with the state is required.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is formed by 1 or more individuals or entities through a special written agreement. The agreement details the organization of the LLC, including provisions for management, assignability of interests, and distribution of profits and losses. LLCs are permitted to engage in any lawful, for-profit business or activity other than banking or insurance. Filing with the state is required.

Corporation

A Corporation is a more complex business structure. A corporation has certain rights, privileges, and liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial benefits, but these can be offset by other considerations, such as increased licensing fees or decreased personal control. Corporations may be formed for profit or nonprofit purposes. Filing with the state is required.

Nonprofit Corporation

A Nonprofit Corporation is a legal entity and is typically run to further an ideal or goal rather than in the interests of profit. Many nonprofits serve the public interest, but some engage in private sector activities. If your nonprofit organization is, or plans to, raise funds from the public, it may also be required to register with the state. Charitable activities may require additional registration. Contact the Office of the Secretary of State for more information.

If you are unsure of what type of business entity is best for your specific business, I strongly encourage you to consult with a lawyer. The information here is strictly for reference and from personal experience and should not be classified as legal advice.

Benefits of an LLC

Both of my businesses are Limited Liability Companies. An LLC keeps my business assets and debts separate from my personal ones whereas when you are a sole proprietorship, you and your business are technically the “same person.” Trust me, you will want to create a hard line between your personal finances and your business. LLCs provide protection, yet they do not require as near as much paperwork as a corporation.

Another huge benefit of the LLC is the way it is taxed. “LLCs get the best of all worlds when it comes to taxation. LLCs don’t have their own federal tax classification, but can adopt the tax status of sole proprietorships, partnerships, S corporations or C corporations.

The Internal Revenue Service automatically classifies LLCs as either partnerships or sole proprietorships, depending on whether they have one owner or more than one owner. This means that LLCs can always take advantage of “pass-through” taxation in which the LLC does not pay any LLC taxes or corporate taxes. Instead, the LLC’s income and expenses pass through to the owners’ personal tax returns, and the owners pay personal income tax on any profits.

In contrast, traditional C corporations are taxed twice on distributions to shareholders: once at the corporate level and once at the individual level. S corporations avoid double taxation and receive pass-through tax treatment, but not all corporations are eligible.

An LLC’s simple and adaptable business structure is perfect for many small businesses. While both corporations and LLCs offer their owners limited personal liability, owners of an LLC can also take advantage of LLC tax benefits, management flexibility and minimal record keeping and reporting requirements (LegalZoom).” Create your LLC now.

Register Your Business Name

Before you land on your business name and get to filing all the paperwork, check to see if it is available. If the exact name is taken in your state, you will not be able to register under that name. When you register your business name with LegalZoom, they provide a place to enter three name options in case the first name is available. You should also check for trademarks and availability of the website domain.

You can register your business name on your state website, but I have loved the ease, simplicity and guidance provided by LegalZoom. I have filed both of my LLCs and registered their names with LegalZoom, and it’s absolutely painless. You may also need to register your business with your local unit government (city/township).

As soon as you confirm the name of your business, purchase your domain. Your website is the hub and face of your business. You want your URL to accurately reflect the name of your business. I recommend purchasing your domain through Google. You can check domain availability and purchase your domain here.

Federal Taxpayer Identification Number (EIN)

If you file with LegalZoom, you can apply for your EIN during the LLC registration process. Sole proprietors who have employees, file pensions or excise tax returns need an EIN. New corporations, partnerships, and LLC’s also need an EIN. In addition, many banks will require an EIN to open a business bank account (my bank did).

Open a Business Bank Account

Once your legal business entity is established open a business bank account which you will use solely for your business. This will save you so much time and energy in the long run. It keeps all your transactions recorded in one place, so when tax time comes around you aren’t in over your head. If you create your LLC with LegalZoom, they send you all the documents you need to open your business bank account. I do my business banking with Chase, but many will tell you there are advantages to banking with a local bank or credit union. That said, there are tradeoffs. Don’t be afraid to shop around. I’ve been so happy with Chase. They make online banking easy. I was also able to get a business credit card with a $500 bonus right off the bat. Hello, credit card reward points!

Get Bookkeeping Software

Now that you are an LLC and have a business bank account, you will want to hook those business accounts (or account) up to bookkeeping software. This allows you to track and categorize your revenue and expenses. It will also help you calculate profit. Keeping detailed records is extremely important when you are a legitimate business. I currently use Quickbooks. It works for bookkeeping as well as invoicing for customers. In addition, it integrates with so many different platforms used for online credit card transactions. Our website uses Stripe credit card processing, and the transactions get automatically recorded in Quickbooks.

Learn Bookkeeping Basics

Learn the basics of how to handle your finances until you can hire a bookkeeping professional. Not only is it a good practice to know how your business is doing when it’s in the first few years, but learning how to do your bookkeeping will make it much easier to hire out when the time comes, and will prevent you from being misled by inexperienced bookkeepers.

After searching for a good resource to provide for business owners in their first few years and not finding anything that fit the bill, my bookkeeper created THE go-to course for teaching entrepreneurs everything about the ins and out of handling their finances (And I mean EVERYTHING you need to know). You can get $100 off the listed course price of $497 with the code THOUGHTFULLYDESIGNED (you pay only $397 and payment plans are available).

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Market Your Business

Alright, the time has come! You are ready to market your business. By doing everything above, you have set yourself up for success. It’s time to start selling. This stage deserves a novel, so I’ll save it for another day! I have tons of resources on the blog under the “Business” tab to help you start gaining traction. Feel free to learn & explore.