How to Start an Online Business

Starting an online business includes many of the same steps required for a bricks-and-mortar company, and even a few more.

If you want to sell goods or services online, you'll have to nail down many details of your business structure and operations before you open your virtual doors. Read on for the steps you need to take to start an online business.

  1. Write a Business Plan
  2. Decide on a Business Structure
  3. Obtain an Employer Identification Number (EIN)
  4. Select a Business Name
  5. Register Your Business
  6. Obtain a Seller's Permit and Resale License
  7. Check for Additional License and Permit Requirements
  8. Apply for Trademarks, Copyrights, and Patents
  9. Develop a Website or Choose a Platform
  10. Comply with PCI and Privacy Requirements
  11. Inventory and Shipping
  12. Buy Insurance
  13. Figure Out Your Start-up Costs

1. Write a Business Plan

You'll need a business plan if you are planning to attract outside investors or get a loan from a financial institution to help finance your start-up. But even if you intend to fund your business yourself, a business plan can help you to project your needs, estimate your start-up costs, and provide a roadmap to tell you when you can expect to turn a profit.

2. Decide on a Business Structure

The most commonly used business structures are sole proprietorships, limited liability companies (LLCs), general partnerships, and corporations. Each differs in how much personal liability protection it provides and the way the business is taxed.

LLCs and corporations offer the greatest protection from personal liability because the law treats the business as a separate entity from the individual owners. Owners are not held responsible for the debts and obligations incurred by the business. Owners of these business types pay individual taxes on income they receive from the business, like wages and profit distributions. The business pays taxes on the income it earns, but owners only pay taxes on the portion of income the business distributes to them.

The owners of sole proprietorships and general partnerships are personally responsible for their business debts and for paying taxes on the business's income.

3. Obtain an Employer Identification Number (EIN)

An EIN, which is issued by the IRS, is like a business's Social Security Number. Getting an EIN isn't required for all business entities, but regardless of your business structure, you'll need one if you employ workers, open a business bank account, and apply for permits and licenses.

4. Select a Business Name

Unless your business is a sole proprietorship or a general partnership, you'll have to select a legal business name in order to register your business in the state or states where you operate. (Sole proprietorships and general partnerships are automatically registered under the names of their owners.)

Online businesses usually must take the added step of registering a domain name—the name that will be your website address, such as www.abccompany—so that customers can find you on the internet.

In most cases, you'll want the same name for your business and your domain, but the procedure for getting a business name is different from getting a domain name. If you want both names to be the same, you'll need to coordinate your efforts, as you'll see below.

How to Choose a Business Name

Just like you introduce yourself by name, you'll want to choose a business name that introduces your company to your customers. It's best to choose a name that describes your product or service (if you choose a nonobvious name, like Klazo, you'll need to spend a lot of money in marketing, trying to teach your would-be customers that your design business is known as Klazo).

The name you use to register your company becomes its legal business name, and each state has its own requirements for what you may and may not include in your company name. (Details on these requirements are available on the website of the Secretary of State or similar agency.)

All states require you to use a name that's unique to your company. Most states offer a free business name search tool, usually on the website of the Secretary of State, so that you can make sure the name you've chosen isn't the same or too similar to another company's name.

It's a good idea to reserve the business name you want to use so it doesn't get nabbed by another company in the time it takes you to complete your registration. Most states allow you to reserve your business name for a limited time at a nominal fee.

Choosing a Domain Name

Domain names must also be unique, but keep in mind that while your legal business name must be unique only in the state or states where you operate, you won't be able to use a domain name that's already in use anywhere in the country.

You can purchase a domain name from a domain registrar for an annual fee, usually between $20-$100. Because these companies also keep track of names already in use, they'll tell you if the name you've chosen is available, and you won't have to conduct a separate search.

5. Register Your Business

The regulations for registering your business differ by state and by business entity and are available on the website of the Secretary of State or similar agency.

Sole proprietorships and general partnerships are the only business entities that aren't required to register with the state.

Registration procedures differ by state for the other business entity types, but you'll typically have to provide your business name, the names and contact information of the owners of the business, a business address, articles of formation if you're operating a LLC and certain types of partnerships, and articles of incorporation if you're operating a corporation.

Most states also require that LLCs, corporations, limited partnerships, and limited liability partnerships designate a registered agent who can receive legal documents, and you'll need to list your registered agent on your registration form.

6. Obtain a Seller's Permit and Resale License

Most states require businesses that sell taxable goods or services to have a seller's permit, which enables the government to keep track of taxes the business collects. You'll find details on the types of businesses required to collect sales tax on the website of your state's Secretary of State or Department of Taxes.

If you are going to be purchasing products that you intend to resell, you'll also need a resale license or certificate. These licenses exempt you from paying taxes on products you purchase for resale.

7. Check for Additional License and Permit Requirements

State requirements for licenses and permits differ, so check with the Secretary of State, Dept. of Commerce, Dept. of Taxes, or similar governing agency in the states where you plan to do business.

The federal government also requires permits and licenses for certain activities and sales it regulates, like alcoholic beverages and aviation. Contact the governing federal agency for more information on these licenses and permits.

8. Apply for Trademarks, Copyrights, and Patents

Trademarks, copyrights, and patents give you legal recourse if others try to use your logo or marketing slogan, authored works such as artwork or music, devices you've invented, or other intellectual property you use or sell in your business.

You can apply for patents and trademarks through the U.S. Patent and Trademark Office or copyrights through the U.S. Copyright Office. Use these offices on an ongoing basis to make sure your work or product isn't owned by someone else.

9. Develop a Website or Choose a Platform

All online businesses need a website, but not all websites can service your online business.

If you are selling goods or services online, you're going to need a platform that allows users to interact with you—by viewing, choosing and purchasing products. At a minimum, you'll need a way to process payments, collect sales tax, track your inventory, and ship your goods.

The type of website and platform you choose will depend on what you're selling, how many features you require, and how much you want to spend. The options include:

Open-Source Website. An open-source website is one you build according to your own needs and specifications. Unless you're a computer whiz, you'll need to hire technology experts to build an open-source website, and you'll need other consultants and professionals to set up different capabilities, like computing sales tax charges, offering customer support, and payment processing.

Third-Party Hosted Website. Ecommerce websites like Amazon and eBay allow you to sell your wares on their site for a fee. These types of hosts do your marketing for you, so you won't need a domain name, a website, or a marketing budget. They'll also handle payment processing, sales tax collection, and sometimes, other details. But you'll be limited in your ability to brand your company.

Service professionals like consultants, photographers, and graphic artists who conduct business online typically use third -party hosts like Wix and Squarespace. Their services are similar to ecommerce sites.

SaaS Website Solutions. SaaS, or software-as-a-service hosts, allow you to conduct business over your own, separate website while they work behind the scenes to provide services like 24/7 customer support, payment processing, tax collection, and inventory management. They also typically provide templates you can use to design your own website, and some offer drop-shipping (a method of sending inventory directly from the manufacturer to the customer), so you don't have to store your own inventory.

These providers (Shopify and BigCommerce are examples) are typically subscription based, and they offer different pricing packages geared to the size and scope of a business.

10. Comply with PCI and Privacy Requirements

Online businesses are subject to laws, regulations, and practice standards specific to operating on the internet. Unless you use a third-party host that provides these features, you'll need to make sure your website is compliant with Payment Card Industry (PCI) standards for gathering and storing payment information. You'll also need encryption tools such as an SSL certificate that verifies that your online interactions are private.

11. Inventory and Shipping

If your online company is an ecommerce business, you'll need inventory to sell. Start-ups often use their home garage or spare room to store inventory. If your homeowner association rules or rental lease doesn't allow you to conduct business from your home, you'll have to rent warehouse space and hire workers to fulfill and ship orders.

If you don't use a third-party host or SaaS platform, you'll also need to decide how you will ship your goods and whether and how you'll pass those costs along to your customer. You'll also need a system to track your inventory, so you know when it's time to restock or reorder.

12. Buy Insurance

Though not required by law, you'll probably also want to purchase one or more insurance policies to protect your business and personal assets. (If you take out a business loan, you might find that the lender requires certain coverages.) Some of the types of insurance policies you might consider include:

  • Casualty insurance: Protects against losses from fire, theft, and the like (don't count on your homeowner's policy to cover business losses).
  • General liability insurance: Provides coverage for claims by customers and other outsiders that your business or products caused injury or damage.
  • Product liability insurance: Covers claims that the products you sell caused injury or damage.
  • Professional liability insurance (also called errors and omissions insurance): Covers service professionals like consultants against claims that their service caused harm or damage.

Businesses with employees, no matter where they work, need Workers' Compensation Insurance.

13. Figure Out Your Start-up Costs

If you haven't detailed your start-up costs in your business plan (or you haven't written a business plan) you'll need to calculate your start-up costs and sales and revenue projections to determine whether you've got enough funding to get your online business off the ground.

Begin by making a list of all your expenses for the steps listed above plus any of the following that apply:

  • IT services for maintaining your website
  • Fees for web hosting
  • Payment processing service fees
  • Customer support services fees
  • Accounting services or software
  • Registered agent service fees
  • Payroll costs and payroll taxes
  • Marketing costs such as advertising
  • Equipment costs including computers, phones, and vehicles

Divide your list into one-time costs (items like registration fees and website development costs) and ongoing costs (such as web hosting and payment processing services).

Compare your sales and revenue projections to your startup expenses to estimate when your business will become profitable, and how much cash you'll need until it does.

If your available funding isn't sufficient, consider using an outside source such as:

Investments and loans from friends and family: Many small business owners turn to friends and family to fund their start-ups. But even when you receive funding from a friend or family member, you should formalize the arrangement. Document the terms and conditions of the loan or investment in writing. Include details such as how and when you will repay the debt or distribute profits.

Bank and credit union loans: You'll need to show the bank your business plan and a detailed list of business expenses and revenue projections if it's not already included. Some types of loans will require that you use personal collateral such as your car or home to guarantee repayment (if you've formed an LLC or corporation, a personal guarantee will, unfortunately, render your personal liability protection useless as to that loan).

Outside investors such as venture capitalists, business suppliers, or business partner companies: You'll also need a detailed business plan to attract outside investors, but unlike securing a loan, using outside investors to fund your startup usually means giving away equity in your business.

Outside investors typically look for a business structure like an LLC or a corporation, which shields them from personal liability. Depending on the arrangement you negotiate, you might also have to give up some management control to your investors, by providing voting shares or appointing them members of your LLC.

Make sure you clarify and document the terms and conditions of the funding. Modify your articles of organization or articles of incorporation to account for the arrangements you negotiate.

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