Chapter 1
Minding the Law
IN THIS CHAPTER
Keeping your business within the law
Determining whether you can legally work from home
Obtaining the necessary licenses to operate your business
One of the first things you discover in owning a business is that you cannot avoid certain specific legal requirements. An Internet business is subject to not only traditional laws imposed on any company but also further regulation. As with the rest of the Net, these rules change quickly, and the burden to keep up is on you.
In this chapter, we review the basic laws so that you can start setting up shop.
We’re not lawyers, and laws differ from state to state. So if you’re the least bit concerned, consult a local attorney to answer any of your questions.
Keeping Your Business Legal
Whether you have an online business or an offline business, you must do certain things to set yourself up and operate legally. If you already have a business that you’re taking online, this advice is probably old news. But if you’re starting your online business from scratch, read on.
Admittedly, quite a few business-related laws exist. As an online business, you must comply with any government regulations specific to e-commerce, as determined by the Federal Trade Commission (FTC). In addition to all federally imposed regulations, you’re also subject to any applicable state, county, and city laws. If you’re selling to companies or individuals outside the United States, you must also comply with International Trade Law. On its website, the U.S. Small Business Administration (SBA) provides good information about business law and regulations, including specific legal requirements for online businesses, as shown in Figure 1-1. You can find this information under the resource tab titled “Starting and Managing,” when you visit www.sba.gov.
FIGURE 1-1: The SBA offers resources to help you better understand basic business law.
At first pass, these legal obligations can be a bit overwhelming. Like everything else in business, though, you take one step at a time and, before you know it, you have a handle on the situation. The same is true with the legalities of operating an online business. Start out on the right foot by getting up to speed with these basic requirements.
Depending on the type of business you’re conducting over the Internet, additional laws or regulations might apply to you. Several good sources to help you research this information include
- A trade association in your industry
- Your local Chamber of Commerce
- State and local government websites
Federal tax identification number
If you have employees or your business is a corporation or partnership, you need a federal tax ID. Officially known as an employer identification number (EIN), this 9-digit number is used to identify a company whenever its owner files certain forms and tax returns.
You can apply for a federal tax ID via the online EIN application at the Internal Revenue Service (IRS) website at www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-EINs. Or if you prefer, you can download the required Form SS-4 and submit the application by fax or regular U.S. mail.
The EIN is requested on many different types of business documents, from bank accounts to loan applications. If you don’t have a federal tax ID number, you can use your Social Security number instead.
Resale certificate
If you sell any type of product, your state might require that you collect and pay a sales tax on every sale. If so, you need to apply for a resale certificate (often associated with buying wholesale). Be aware that the amount of sales tax to collect, the dates the tax is due, and the rules of collection vary by state. For that reason, you should check the regulations for the state in which your business is physically located. Because exceptions to the rules often exist or other details can be difficult to understand, also consider talking with a certified public accountant.
Business bank account
When you first begin to operate a business, you might be tempted to run all your money through an existing personal account. Trust us: This technique happens quite often and is rarely a good idea. Why do people do it? If you’re just testing out your business idea, opening a separate account might seem unnecessary. Or perhaps you view it as a way to save some money on bank fees. Unless you plan to maintain your idea strictly as a hobby, however, you need to open a business bank account immediately. Otherwise, it becomes too easy to commingle personal and business expenses. How can you possibly separate them if they share a bank account?
When you open a business account, the bank needs specific information, such as a copy of your business license, your federal tax ID number or Social Security number, and, possibly, proof of incorporation if you want your legally incorporated business name on the account.
Consider opening two bank accounts: one for all your daily transactions and the other for dealing with sales tax, employee withholding, and other regular tax payments. Keeping these items separate and using simple money transfers from one account to another can help you keep your payroll and employee finances separate and easier to manage. Meet with your bank’s manager to find out what perks may be available when opening one or more business accounts.
Employee forms
When you hire others to work for your company (even if you are your only employee), the IRS wants to be in the know, and that involves forms, of course. You should be familiar with several forms required by the IRS:
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Form W-9: When you hire independent contractors (nonemployees), consultants, or self-employed individuals to perform work, have them complete IRS Form W-9. This form provides you with the information you need to report earnings to the IRS and generate a Form 1099 (see the next bullet point) that reports their earnings at the end of the year.
When you’re hiring independent contractors, be sure to check the IRS definition of what constitutes a contractor (versus an employee). For instance, if you have workspace available at your office for the contractor or require the person to work a set schedule, you could cause an independent contractor to be considered an employee. If that’s the case, you’re responsible for withholding taxes. You can even be fined (with interest) if you don’t withhold wages and the mistake is discovered later. -
Form 1099: If you hire someone (other than an employee or a corporation) to do work for your company, you need to send that person a Form 1099 at the end of the year. (You are legally mandated to provide a copy of the form to the recipient by January 31 of the following year.) You’re required to complete this form only if you made one or more payments to the individual totaling $600 or more within the tax year. If you’re not incorporated and provide a service for another company, you receive a Form 1099.
If you barter or trade services or products with another company, the IRS expects you to report, on Form 1099, the value of that trade as income. - Form W-4: If you have employees, they must fill out Form W-4s so that you can withhold, report, and deposit their correct amount of employment-related taxes. You’re responsible for withholding, or taking out, money for income tax, Social Security, Medicare, and federal unemployment taxes (FUTA).
- Form W-2: By the last day of January following the end of each calendar year, you’re responsible for sending this form to your employees. A W-2 reports the total income an employee earned from you during the preceding calendar year, along with the amount of money you withheld for various taxes during the year.
Zoning for Business (at Home)
Your home is the ideal place to start an online business. Working out of your house makes business setup quick and easy, and it equates to low overhead. Before you convert that spare bedroom into an office, however, you need to determine whether you’re allowed to operate a business from your home.
The answer typically comes down to a single word: zoning. Most cities and towns have zoning ordinances that define how a particular piece of land or group of properties can be used. They further specify which types of activities can occur there. For example, some neighborhoods are zoned for residential, which means that only single-family homes can be built in that area. Other areas might allow multifamily (apartments) residential. In the area of commercial or business use, the zoning becomes more complicated because businesses are often separated by types of industry. An area might also be labeled mixed use, which allows both residential and some types of limited commercial activity.
How do you decide whether your residential neighborhood is zoned for business? Check with your city’s licensing or planning department. When you provide your address, the city clerk can tell you whether your neighborhood has any restrictions that would prevent you from opening your business.
Some cities and counties make zoning maps, along with a detailed list of city ordinances, available online. If your city has a website, start there first.
Assuming that all goes well and you find no restrictive ordinances, you’ll be in business quickly. But sometimes this isn’t the case and your home-based business isn’t allowed. Then you have to ask for a variance, or an exception to the zoning ordinance. Fortunately, because millions of people are working from home now, many cities have already established criteria for such exceptions. Even if your neighborhood isn’t specifically zoned for business, therefore, your city might allow small home-based businesses if they meet certain conditions.
To grant a variance, cities and counties want assurance that your business doesn’t have
- High-volume street traffic
- Increased activity (by customers) in and out of the home
- Large trucks on-site (delivery trucks or company vehicles)
- Required additional parking
- Exterior signage
- The use or storage of harmful chemicals
- Warehousing of a large number of products
- The on-site sale of products to the public (such as what takes place at retail locations)
- Employees (usually more than three or four) working on-site
These conditions are in place primarily to ensure that your business activities do not adversely affect your neighbors nor have an effect on residential property values. Luckily, most Internet-based endeavors don’t create such nuisances. Be sure to reiterate this point with city planners when you’re pursuing a variance request for your business.
If your business involves storing and shipping large numbers of products, you might want to lease an off-site storage facility or arrange to have your products shipped from a distribution facility. It not only eases concerns from city officials initially but is also a good preventive measure to keep your neighbors happy.
Increasingly, zoning isn’t the only concern when you’re starting a home-based business. Many cities are now requiring home occupational permits. If you want to operate from your home, you’re required to have this permit — no matter what your business. The good news is that certain occupations or business types are often automatically granted permits (and computer or Internet-related businesses are almost always included). However, you might have to qualify for a permit based on a long list of conditions that are similar to the criteria used in seeking a zoning variance (noise, traffic, on-site sales, and employees, for example). When you apply for a home occupational permit, you might also be asked to provide a list of all your neighbors and their addresses. The city then sends notice of your intent to operate a business from your home and gives your neighbors an opportunity to object. Even with this caveat, obtaining a home occupational permit can be much easier (and faster) than having to get a zoning variance granted. When you apply for the permit, expect to pay a small fee, ranging from $1 to $75.
A home occupational permit doesn’t take the place of a business license. To operate legally, you must have both. See the next section to find out how to obtain the all-important business license.
Is that all you have to do? Not quite. Even if your home clears municipal zoning ordinances and home occupational permits, other obstacles can stop you from operating a home-based business, or alter the way in which you operate:
- Your homeowners’ association: Residents of subdivisions, condominiums, and some neighborhood communities often have homeowners’ associations. If you’re in this group, some restrictive covenants (or rules) probably govern your home and what you do to it, with it, and in it. The rules might also cover operating a business from your house. Read your covenants or bylaws carefully because even if your city doesn’t restrict your business use of your home, these covenants might. If a problem exists, you can always go to the board of directors that manages your homeowners’ association and try to obtain an exception.
- Landlords: If you lease an apartment or house, the rental agreement might prohibit you from conducting any business activity on the property. Review your lease thoroughly for clauses that specify how you can use the property.
If you choose to ignore legal restrictions concerning how your property can be used, you’re taking a considerable risk. If your business activity is discovered, city officials could shut down your business, your homeowner’s association could impose steep fines (and even put a lien on your home), or your landlord could evict you.
Obtaining Business Licenses
Regardless of where your business is located, you need a license to operate it. A business license is a piece of paper granting you the right to do business within a city, county, or state. Licenses are typically valid for a one- or two-year period and are nontransferable. (If you sell the business, the license is void.) You have to pay a fee when you apply for your license. The amount is often based on the type of business you operate and can range from $25 to several thousand dollars.
You (and not a city clerk) should specify which business category you fall under when you apply for your license, because a category specifically for an Internet-based, or e-commerce, business might not exist. Instead, you have to select a broad category based on the specific activity conducted through your site. Some categories can require steep licensing fees and might not, in fact, apply to you. Scour the entire list and the accompanying fees. Then choose the one most related to your business and with the lowest fee.
In addition to obtaining a city-issued license, you might be required to have a license for the county in which you’re operating your business. This license is similar to a city license but is often less restrictive and less expensive. Be aware that some occupations (building contractors, realtors, and other professional service providers, for example) might further require that you obtain a state license. Although you probably don’t need a state license to operate your online business, you can double-check by visiting your state’s website.
To help you find out where to go for your city and county licenses, the SBA offers an online list for all 51 states, plus Puerto Rico, Guam, and the U.S. Virgin Islands. You can find the Where to Obtain Business Licenses list at the SBA.gov site: www.sba.gov/starting-business/business-licenses-permits/state-licenses-permits.