The Boring Truth About Starting An Online Shop
You pick a niche. You build a store. Then the government finds out and you realize you have no idea what paperwork you actually need. This is where most people either quit or get their account frozen three months into making sales. I went through this with my own Shopify store back in 2019. Spent about six weeks chasing down the wrong permits because nobody tells you the difference between a seller's permit and a business license before you start selling. Let me walk you through what this actually involves, in the order that matters, not the order the government would like you to fill things out. Most beginners skip this. They open a Stripe account, list products, and then realize a month later they need an EIN. You should form your legal entity before you accept a single dollar. I learned this when a customer charged back a $4,000 order and my sole proprietorship meant the IRS and the card network both came after me personally. An LLC at least creates a boundary, even if it is not a perfect one.
Register with your secretary of state. Pick a name that is actually available, not just the one you wanted. Check the state's database, not just Namechk.com, because those domains can be taken by someone who never registered a business. Pay the filing fee. Get your certificate of formation. This usually takes three to ten business days depending on the state. Wyoming and Delaware are fast but not necessarily the right choice for a small shop just starting out. Texas and Colorado have reasonable fees and straightforward processes.
Step Two: The EIN Is Free And You Should Get It Immediately
Go to irs.gov and apply online. It is free. You get the number the same day. Do not pay a service to do this for you. I have seen people hand over $200 for something that takes eight minutes on the IRS website. Once you have the EIN, open a business bank account. Keep personal and business money completely separate. Commingling funds pierces your LLC veil faster than anything else. A friend of mine had a perfectly formed LLC for his print-on-demand store and then paid for his kid's soccer camp with the business card. When he got audited, the auditor disallowed every expense for three years because of that single mistake.
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Step Three: Seller's Permits And Sales Tax Registration
This is the part that confuses everyone. A seller's permit, sometimes called a sales tax permit or resale certificate, is how you collect and remit sales tax legally. You need one in every state where you have nexus. Nexus is the legal term for "you have enough connection to this state that they get to tax you." Physical presence creates nexus. An employee, a warehouse, a storefront. Economic nexus is the newer standard and it has caught a lot of people off guard. If you sell more than $100,000 or 200 transactions into a state in a calendar year, you owe sales tax there. Thirty-eight states have adopted this threshold. The rule changed in 2018 with the South Dakota v. Wayfair Supreme Court decision and nobody properly warned small sellers about it. I found this out the hard way. My store hit $112,000 in sales into California in its first year and I had never registered for a California seller's permit. The Franchise Tax Board sent a notice and a penalty estimate of about $8,000. I negotiated it down to about $2,100 by showing voluntary compliance and good faith, which means having a paper trail that you tried to do the right thing. Do not ignore these notices. They escalate fast.
Step Four: Local Business Licenses
Even if you operate entirely from home, your city or county likely requires a general business license. Some jurisdictions charge a flat fee. Others tier it based on gross receipts. I have seen permits range from $50 in a small town to $400 in a major city. Check your city clerk's website and your county business tax receipt page. There is no federal business license for online shops. The entire structure is local and state level. If you sell food, cosmetics, or anything ingested or applied to skin, you need additional permits. FDA registration for food facilities, state cosmetic notifications, FDA establishment registration. This is where things get expensive and complicated fast. One vendor I know spent $15,000 on compliance just to sell handmade soap across state lines.
Step Five: Payment Processor Compliance
Stripe, PayPal, Square — they all have their own merchant guidelines. Some product categories get flagged as high risk and trigger manual reviews that can freeze your funds for 180 days. Subscription businesses, digital products, and anything involving intellectual property claims sit in a gray zone that processors do not like. I ran into this when my store was processing about $8,000 a month and Stripe suddenly restricted the account. They asked for proof of fulfillment, supplier invoices, and customer service policies. I had none of that organized because I had been shipping products directly from a wholesaler without documenting the chain. It took me eleven business days and about forty emails to get reinstated. Since then I keep a folder with three things: purchase orders from every supplier, fulfillment confirmation screenshots for every order above $100, and a dated copy of my refund policy on the site. Processors want to see that you are not running a shell operation.
Step Six: Intellectual Property And Product Compliance
Do not sell anything with someone else's trademark on it. Period. I see people on Facebook groups asking whether they can sell Disney-themed products "as long as I make it myself." No. You cannot. The penalties for trademark infringement in e-commerce are not theoretical. I watched a store owner get sued for $47,000 in statutory damages for selling unlicensed characters on Amazon. The case settled before trial but he still paid half. Check the USPTO database before you list any product. Use tmdr.uspto.gov. Search the exact mark and the related class of goods. If you source from Alibaba or AliExpress, those listings are almost never properly licensed. The supplier might be faking the brand authorization document. Verify it yourself by calling the brand's licensing department directly.
Step Seven: Record Keeping That Actually Survives An Audit
You need to keep records for at least three years from the date you file, ideally seven. Sales invoices, expense receipts, permit renewals, license payments. Use a proper accounting system, not a spreadsheet named "money stuff 2024." QuickBooks Online or Xero will connect to your bank and credit cards and auto-categorize transactions. It costs about $30 a month and will save you hundreds in accountant fees every year. The biggest mistake I see sellers use personal accounts for business and then spend weekends trying to reconstruct a year of transactions from bank statements. It is painful and inaccurate. Just separate the accounts from day one.
Where This Approach Breaks Down
Legal setup is not a one-time event. Permits expire. Seller's permit registrations need annual or biennial renewal. Your LLC may require an annual report and franchise tax filing in some states. I lost track of my Delaware annual franchise tax for a year and got hit with a $200 late fee plus interest. Set a calendar reminder six weeks before every deadline. Also, this guide covers the baseline for a simple product-based online store. If you are doing subscriptions, digital downloads, marketplace selling, or operating internationally, the requirements multiply quickly. Marketplace facilitator laws now require Amazon and eBay to collect and remit sales tax in most states, but that does not protect you from other obligations. You still need your business license, your EIN, and proper accounting regardless of who collects the tax. Getting the permits right does not guarantee profitability. It just keeps you out of trouble while you figure out whether your product actually sells. Most people skip straight to the marketing and come back to compliance when something breaks. Do not be most people.
