E-commerce has made traditional businesses focus more on their online presence than ever before.  Many brick-and-mortar companies have even turned into exclusively online entities!  For online businesses, there are many legal requirements with which to comply.  This article’s main focus will be on business law for online businesses and what this entails.

Business Structure

As with brick-and-mortar businesses, common business structures for online businesses include: sole proprietorship, partnership, limited liability company (LLC), and corporation.  Each has different tax implications and liability protection.  If the online business is new, the pros and cons of each business structure should be weighed.  

Sole Proprietorship

A sole proprietorship is often the least complicated, but the least protective. It is also usually the least expensive way to set up a business.  However, this comes with significant risks.  For example, there is no distinction between the owner’s business and personal assets.  The owner will remain personally liable for any business debts and liabilities incurred. 

Partnership

A partnership is when two or more individuals co-own a company. As with a sole proprietorship, the partners are personally liable for all the business’s obligations.  Including, those incurred by each of the business partner(s).

LLC

An LLC (limited liability company) can be formed by one, or multiple, owners.  Members are protected from personal liability for business decisions or most actions of the LLC (other than items like “trust” taxes and wages).  This offers the business members more flexibility.

Corporation

A corporation, like an LLC, is its own legal entity which is separate from its owners, otherwise called “shareholders”. Corporations are responsible for their own liability and business debts.  For this reason, shareholders’ liability is normally limited to the amount they pay for their shares.  

By default, all corporations are “C” corporations unless shareholders elect an “S” treatment. In general, C corporations tend to be larger companies. S corporations tend to be smaller businesses or sole proprietorships.  The main difference relates to their federal income tax liability (including “double taxation” of C-corps) and ownership structures.  

Understanding which business structure is best for each business may seem complicated.  If help is needed, we recommend speaking to a business lawyer.  In the meantime, more information concerning business structure can be found in this article.

Business Registration

Regardless of a business being mostly (if not fully) operated online, it is best practices to be an entity registered in the state where it is operating.  Any necessary licenses and permits should also be obtained to operate the business legally.  

Your entity should obtain a federal tax ID (Employer Identification Number) and comply with federal regulations. 

Business Name

To register the business, a proper business name is required.  Selecting the right name for the brand is important for numerous reasons.  It may be associated with you, your products, and your “good-will” for however long you choose to run the business.  It also may be used in marketing and branding.  It’s encouraged to select a name that can grow with the business while staying true to its values.  And the name has to meet the naming requirements of §204 of New York’s Limited Liability Company Law.

There are various naming guidelines according to the business structure.  For example, limited liability companies may include “LLC” or “PLLC” and corporations may include “Corp.” or “Inc”.  Any name selected should be distinguishable from other existing names in the New York State Division of Corporations database. This is to avoid trademark infringement (discussed further below).

Luckily, they facilitate this process with a name availability search.  If the desired name is available, you might want to reserve it (though not required). This can be done by filing the Application for Reservation of Name along with submitting the appropriate fee.

Avoid Trademark Infringement

If the brand of your service or product is unique, registering a trademark (or service mark, as the case may be) is helps protect your intellectual property.  Your brand should not be confusingly similar someone else’s trademark name.  This will prevent consumers from getting confused in differentiating which company offers which products/services.

You can search the United States Patent and Trademark Office database to determine if the name has been taken. If a trademark exists that is very similar to yours, it is best to maybe change the name of your business so it is no longer confusingly similar. 

Open A Business Bank Account

Business finances should be kept separate from personal finances.  This protects any personal assets and it simplifies bookkeeping.  In general, it helps to manage the business more effectively!  Once the business has a tax ID, the next priority should be to apply for a business bank account. This will be done under the business’s name.  

Hire A Registered Agent

New York business law makes it mandatory to designate and continuously maintain a registered agent in the state. A registered agent can be the company itself or an individual (or business) in New York who acts as your representative for service of process (SOP).  

While they are important for numerous reasons, ownership anonymity and ease of changing the company’s address without making a state filing are two of many.

Sales Tax Registration

Online businesses that sell tangible personal property must register as a sales tax vendor.  (For example, selling furniture, equipment/machinery, jewelry, household goods, appliances etc.). Such businesses must collect and remit sales tax on taxable sales. This applies even if they don’t have a physical presence in New York.  Depending on the specific business activity, they may also be subjected to other taxes.

Online sales tax laws and regulations are constantly changing.  It is recommended to stay up-to-date on all developments and tax obligations such as income taxes.  Keeping detailed financial records is advised in case of a tax audit.

It’s free to register as a New York State Sales Tax Vendor and free to register for a New York State Sales Tax Certificate of Authority (this must be done at least 20 days before the business opens online).

Licenses and Permits

Most businesses will need one or more online business licenses and permits to operate in New York.  This must be done before beginning operations.  Checking the New York Business Express website makes it easy to determine which ones are needed for your particular business activities. 

The requirements and fees for obtaining these documents will vary depending on the business activities, location, and other applicable rules.  Some of the licenses and permits expire after a set time.  Keeping track of when they need to be renewed should also be a priority. 

Reporting

In New York, corporations and LLCs need to file a report every two years.  This is known as a biennial statement or biennial report; these will be of public record.  The main purpose of the report is to keep the state updated with your business’s most updated information.  This includes contact information and the main employees/members.  

If you’ve already provided the Department of State with an email address, you should receive notice before your biennial report is due. (Are you unsure if this has been done or if the email address has changed? The email address can be updated through New York’s Email Address Submission/Update Service).  If, for some reason, you never received a notice, you are still responsible for your filing on time.

If the report is not filed on time, the business may lose its good standing and be marked as delinquent.  This can prevent certain business transactions from being made and should be avoided!  If the report is never filed, the business may be dissolved. This removes any liability protections provided by the business’s corporate or LLC status.  A process for reinstatement would then need to be followed.

Website Compliance

Typically, products and services will be sold directly through your website or a third-party platform.  This depends on whether the business has adequate means to operate the website and handle fulfilling orders.  

Online businesses must comply with certain privacy policies, accessibility standards, and terms of use.  Consumer legal materials should also be available on the website for visitors and consumers.  This includes:

• Website terms of use
• Website privacy policy: this explains the company practices for collecting, storing, using, and disclosing user information
• Sale and purchase terms of use: this covers customer service, payment, order information and changes, shipping, returns etc.

Age Restrictions

Whenever a website is launched, it must comply with COPPA, the Children’s Online Privacy Protection Act (COPPA). The most relevant aspect is that the website must not collect personal information from anyone under the age of 13.

This becomes more relevant if the product or service is specifically designed for that age group.  Failure to comply with such acts opens the risk of being fined.  Every country is different, so check relevant legislation beforehand.   Also, it you are selling products or services online, your customers must have capacity to enter into a contract, including being over the age of majority (at least the age of 18 in most states).

Payment Card Industry Compliance

Payment Card Industry (PCI) Data Security Standard (DSS) is a commercial security standard.  Its goal is to use unified standards for securely processing card transactions and ensure compliance.  While this covers POS transactions, it also applies to transactions made over the phone and online.  

Being PCI compliant is more than providing a secure way for users to shop on a website.  It also requires online business owners to avoid storing purchasing information.  The penalties for noncompliance include fines and account agreements can be terminated.  In many cases, credit card processors have begun to include PCI measures already included in their services.  However, this should be confirmed to ensure proper compliance.

Contracts and Agreements 

Similarly, if a third party is used, there should be clearly drafted and legally binding contractual agreements. For example, agreements pertaining to partnerships, service agreements, and terms of sale.   

This may include but is not limited to taking and processing orders, and the payment and sales tax calculations. Fulfilling orders, handling returns, creating the procedures for complying with securing data, legal requirements, and privacy may also be involved.  It is important to include anything that concerns the services provided. This will limit the possible legal risks incurred by the business.

Online Business Insurance

As with other types of businesses, online businesses should have insurance to protect them from potential liabilities and other risks.  This includes general and product liability, business interruptions, errors, copyright infringement, and libel/slander, and more recently, cyber threats like ransom-ware attacks and data theft. It is also worth asking about professional liability insurance (errors and omissions insurance).  This can protect businesses against malpractice, error, and negligence.

If you operate as an LLC, personal assets may already be protected.  However, consulting with an insurance broker is advised. They will confirm whether the information you have is accurate for your circumstances.  Depending on the laws of where you operate, where your entity was formed, and other factors, your protection may vary.  A professional will select the proper coverage for the business’s needs.

Online Business Law – Protection for Your Online Businesses

While the above points are vital starting points for online businesses, they are intended for informational purposes only.  It is best to speak to an attorney to ensure you are properly protected in all matters of online business law.  Depending on the location, the goods and/or services being sold, and many other variables, other laws may be relevant.  

For example, if the online business is run from a person’s home. There may be property, health, safety, and zoning laws that are applicable.  Various other terms and conditions may also apply depending on the business and its target customers.  Online businesses may also be subject to additional requirements if operating in New York City depending on their unique circumstances.   

This post is for informational purposes only.  If you have any questions or need legal advice, call Craig Delsack, a New York Business attorney today at 212-688-8944 for a no fee, no obligation initial telephone consultation, or complete the form on this page.