In this exciting step concerning starting your new online business, things are about to get real! 😱
In order to set up your business infrastructure, you’re going to be creating a legal entity, opening your business accounts, and signing legally-binding agreements that might have significant legal and tax ramifications.
So, although this process can be thrilling and fun, it is extremely important that you take your time in this step and really think through each decision.
Since we’re going to be talking about legal and financial matters, make sure to do your own due diligence and research into any service you’re thinking of using. The information in this article should not be considered financial or legal advice. It is for educational purposes only.
PRO TIP: Although most of the discussions in this step are about forming a new online business in the United States, the general ideas in these topics likely still apply to those creating new businesses elsewhere in the world.
This is Step 3 of 8 steps in the How-to-Start-an-Online-Business checklist.
Do you need legal counsel?
Depending on the type of business you want to start, and how involved you want to be in the legal details of setting up your business, you’ll probably want some form of legal counsel to set up and legally form your new online business.
But don’t worry! We’ll go through each of the major topics below, one by one. 😊
Although you’ll definitely encounter companies and services that cater to a single aspect of legally forming your new business, it’s much more common to find companies that offer all-in-one legal services.
For example, the companies below offer a variety of business-related legal services that will help you with many of the topics we’ll cover in this article. They also offer various forms of direct access to lawyers, attorneys, and legal consultation, in case you have specific questions relating to your own special situation.
But before you dive too deep into the services above, you’ll probably want to learn more about why you even need their services.
So, let’s continue!
What is a legal business entity?
A legal business entity is an official company or organizational structure that is created to do business. A legal entity can be created by one individual or by multiple individuals.
According to federal and state rules, specific types of legal entities can grant you special rights, such as allowing you to enter into contracts to do business. However, some entities might also require you to meet specific obligations, such as paying certain business taxes or filing reports with the government.
Each business entity also has its own liability rules, which describe who is liable for any debts and claims resulting from your business.
What are the types of legal entities you can create?
In the US, there are 5 primary business entity types that you can create:
The default entity type for individuals who run an unincorporated business. It is by far the most simple business type that requires very little setup, fees, and maintenance! However, it doesn’t offer you the protection and potential tax breaks that other entities can offer, depending on your situation.
Your business name can be your own name (or part of your name), or you can do business as (DBA) another name if you file the appropriate forms.
You can do business using your own SSN, or sign up for an employer identification number (EIN) to cover all of your DBAs and side businesses.
Business income and expenses are passed through to your personal identity, which means that you are responsible for all gains and losses via your own taxes. This also means that you are personally liable for what your business does, including any lawsuits, accidents, debts, or claims you might encounter. This can be offset or mitigated by purchasing business insurance (see the section below about Business Insurance).
You can hire contractors and employees, but certain limitations and rules apply.
The business entity is tied to your identity and ends when you pass away. It is therefore also more difficult to sell a sole proprietorship business, if that is your ultimate goal.
Limited Liability Company (LLC)
A hybrid entity type that protects you and your members from your company’s debts and liabilities. In other words, if your LLC gets sued or has liabilities, your personal assets are protected. This is a very common choice for those who want a relatively simple setup, but want more protection and potential tax breaks than a sole proprietorship can offer.
Similar to a sole proprietorship, an LLC is a pass-through entity as it relates to your taxes. However, you can elect to have your LLC taxed like a corporation if you so choose.
Requires a board of directors, annual meetings, and other record-keeping tasks.
It is possible to have an LLC with just one owner… this is called a single-member LLC.
A business you create with one or more other people, who help you run the business. The business identity is directly tied to the identity of the partners… a partnership entity does not otherwise have its own legal identity. So, if one partner dies or sells all shares, then the partnership ends.
Similar to a sole proprietorship, partners do not have to file any paperwork with the government in order to start the partnership business.
A separate legal entity that is distinct from your personal identity.
Your corporation will need to file its own taxes, separate from your personal taxes.
A corporation provides you with limited liability and will continue on even after your death.
A special type of corporation type that passes through your corporate income, gains, losses, credits, etc. to the corporation’s shareholders. This is somewhat similar to how sole proprietorship taxes work but has some key differences.
PRO TIP: Nonprofits that fall under the IRS 501(c) code, which includes NPOs and NFPOs, are their own types of entities that are not subject to tax. Some of the business formation services I’ve already mentioned above can also help you create a nonprofit business.
Whether you’re creating a larger commercial business for profit, a small online business, or just doing individual freelance work online, you’ll want to carefully consider which type of legal entity you create and understand the ramifications.
How do you form a legal entity?
As you can see, there are a lot of things to consider when forming a legal entity. 🤪 I would recommend you get some legal help to step you through the process.
Although it is possible to change your entity type later, it will require you to redo many steps, including changing the owner of your existing accounts or creating new accounts altogether.
Many of the services I already mentioned above can help jumpstart the startup process and facilitate the entire creation and management of your new online business, including doing the necessary filing for your fictitious business names and DBAs.
What is a Registered Agent?
A registered agent (RA), sometimes also called a resident agent, is legally required by most states to help make sure others can send you important business documents.
This includes accepting mail on your behalf and receiving in-person delivery of serious documents, such as official state correspondences, legal notices, and court-related documents.
Without a registered agent, you might be penalized. However, common-law business entities such as sole proprietorships and general partnerships do not require an RA.
A bonus for using a registered agent is that they give you a little more privacy. Any legal actions will be served via your registered agent instead of directly to you. Also, the registered agent’s address instead of your own will be in the public record.
How do you get your Federal EIN and State Tax ID?
Once you decide on a legal entity, make sure you file for the necessary federal and state tax IDs.
A federal employer identification number (EIN or FEIN) is a unique 9-digit federal tax ID that identifies your business entity.
If you’re going the sole proprietorship route, you can use your social security number (SSN). However, if you don’t want to give out your personal SSN when submitting W9s or filling out forms, you might prefer to create an EIN anyway:
- Might be required to open a business bank account.
- Helps protect your identity, which can reduce the risk of identity theft.
- Makes your business look more legitimate.
You can either work directly with the IRS to create your own EIN, or use a service to handle the process for you and make sure everything is properly set up.
If you want to do it yourself, check out the IRS page about applying for an EIN. Otherwise, here are some services you can use to help you out.
A state tax identification number, also known as a state employer ID or state EIN, is a similar number assigned to your business by the state.
If you’re a sole proprietor without any employees, then you might not need a state tax ID… but you should check with your state to make sure! The businesses above should also help you through that process.
How do you choose your business address?
When you set up your business entity, one of the first things you’ll need to figure out is what address to use for your business. Your business address is usually different than the registered agent’s address.
Some agreements and services you’ll encounter might require a real, physical business address… not a PO Box.
Depending on the type of business you are creating, you might want to use your own personal address. But that definitely has its drawbacks, since your address will likely be made public in many situations.
If you don’t have a separate physical location for your business, another option is to use a service that provides a bonafide physical business address on your behalf. These addresses are often called virtual addresses.
You can get a virtual address through a virtual office service, which can also provide virtual phone services as well, which we will cover in the next section.
These virtual office solutions often offer other related mail services, such as mail storage, digital scanning, mail filtering, mail forwarding, check deposit, shredding services, virtual assistants, and bundled registered agent services.
PRO TIP: Virtual office services are especially helpful for frequent travelers and for those who like working from beaches along the coast! 😉
Here are some virtual office and address services you should consider:
Virtual Office Services
What phone number should you use for your business?
Similar to your physical address, you might not want to use your own home or mobile phone number for business purposes. Instead, you should consider creating a separate business phone number.
You can often do this by adding a business line to your existing phone service.
However, what if you want your phone number to have a specific area code? Well, that is possible to do by getting a virtual phone number.
Similar to virtual addresses, you can create a virtual phone number to use just for your business. These phone services can even forward business calls to your personal phone number.
These virtual phone services also sometimes include other neat features, such as texting, voicemail transcription, and taking and making business calls from your laptop.
Check out these virtual phone services to get started:
Do you need a fax number?
Yes, believe it or not, some businesses still need to send and receive faxes! 😲
But don’t worry, there are numerous fax solutions that bring faxing into the modern age. You don’t actually need a physical fax machine anymore!
Beyond providing you with a fax number, most modern fax services also allow you to use any device to send and receive faxes, including sending faxes through email. Similar to virtual phone numbers, you can also select a local area code of your choice.
For example, check out what these companies have to offer:
How do you set up your business email?
In the last article about setting up your online business, we went over how to choose and register your domain name for your business. Now, we’re going to use that domain name to set up your business email system.
First off, we should go over some email basics.
What are email mailboxes?
Traditional email mailbox accounts are associated with a single email address and include both the processing and storage of emails that you send and receive.
These accounts usually must be configured and set up ahead of time on a server that manages your domain name. Mailboxes have their own username and password. Some accounts have storage limits, size limits, and rate limits… and some have very aggressive spam filtering.
A domain name system (DNS) is what controls how domain names get mapped to IP addresses behind the scenes. You can think of IP addresses as the locations of actual servers that do stuff for your domain.
When you set up your domain name, your domain name registrar automatically set up some basic DNS records for you. One of those DNS records specifies which server controls your email for your domain. You can change DNS records at any time, in case you want a different server or service to control your domain email.
PRO TIP: You can have one server control your email, while another server controls your website… and so on. This can be controlled via your DNS settings.
Once an email mailbox account is set up on your email server, you can send and receive email messages using that email address either directly through your email provider or through any email service that can connect to your provider using special protocols: POP3/SMTP/IMAP.
PRO TIP: If you plan on sending lots of emails or newsletters through your email address, you should be aware of anti-spam rules, rate limits, delivery rates, blacklists, etc. We’ll cover all of that in Step 7, the article about marketing. The upshot is that it’s probably best to use a dedicated newsletter service to send bulk emails.
What are email forwarders?
Although it is possible to create a new email mailbox for every single email address you want to create, it is much simpler to use email forwarders, also known as email aliases.
Email forwarding is pretty much how it sounds: you create a virtual email address or alias, and any mail sent to that email address will be forwarded to one or more other email addresses of your choice. For example, you could create several email addresses for your domain that all forward to a single email mailbox that you regularly check. Or you could create one email that forwards to several people on your team.
Generally speaking, email forwarding is best used when you want to receive email from multiple addresses. If your business setup requires you to also send messages from a given email address, then you’ll probably need to create a separate mailbox for that email address in order to send emails.
It’s possible to both have a mailbox for an email address AND also forward emails for that same email address. In this case, any emails received will be stored in your mailbox as well as forwarded to the other email addresses you set up.
Email forwards are super simple to set up, they don’t use up extra storage, they don’t require a new username/password, and they don’t require all of the other configuration and maintenance like a regular email mailbox.
Which business email system should you choose?
So, what does this all mean for you? Well, fortunately, and unfortunately, you have a lot of options for how to proceed! Here are a few tips and suggestions:
email@example.com, and then create several standard forwards, such as
info@that all point to
Here are a few approaches for choosing and setting up your email service:
PRO TIP: Do you already have your email set up somewhere, but you don’t want to use Google Workspace and you’re sad that you can’t use Gmail? 😢 Well, did you know you can use Gmail to send and receive business emails from your existing personal Gmail account?
How do you set up your business bank account?
Now that you have your legal business entity set up, including your business IDs, address, and phone number, it’s time to set up your business bank account.
No matter if you’re sticking with a sole proprietorship, going with an LLC, or creating a corporation, you need to make sure to keep your business transactions separate from your personal transactions. This is very important for many reasons: your sanity, accounting, tax purposes, liability, and if you ever want to sell or transfer your business in the future.
Ideally, you’ll want to look for companies that offer these business banking features:
If you’re happy with the bank you currently use, you can likely contact them to add a business checking account for you. Otherwise, check out these business banking options:
Business Banking Services
What business licenses and permits do you need?
Depending on the type of business you are creating and the industry you are in, you’ll need to acquire the necessary local, state, or federal licenses and permits.
Local licenses might include any licenses required by your county or city. These are also often very specific to your type of business.
You should have received a general business license (if required for your business type) when you created your business entity and filed your paperwork with your state.
If you also have a physical business presence, you might be required to obtain various types of permits: zoning, health, environmental, and building permits.
For home-based businesses, your local regulations might require you to obtain these types of permits: zoning, fire, special-use, or home-occupation permits.
If your online business is selling goods, you might also be required to obtain a seller’s permit from your state. A seller’s permit is different than your general business license. Each state has its own rules for seller’s permits… so check with your state.
PRO TIP: It’s possible, especially in the case of online businesses, that after investigating all of the above, you find you won’t need any additional licenses or permits to start your business. 😎
If you’re using one of those all-in-one service business formation services mentioned at the beginning of this article, such as Northwest, they will help guide you through all of the steps required for obtaining licenses and permits.
Copyrights, Patents & Trademarks
There are two things you need to be aware of with regard to copyrights, patents, and trademarks:
How you are allowed to use other people’s names, content, products, designs, and inventions.
How you can protect your own names, content, products, designs, and inventions from abuse by others.
What is a copyright?
A copyright protects your original creations. This can be flashy things like artwork, songs, movies, or books… or much more mundane things like programming code, software, and blog articles like this one. 😉
The copyright symbol is shown as © or (c).
Once you create an original work on a physical or digital medium, you are automatically granted copyright protection for that work. You don’t even need to file for the protection or use that fancy little © symbol.
However, if you file with the copyright office, they can provide you with even more protection and/or help if you need to sue someone that is using your copyrighted work without permission. The more documentation you have showing that you own the copyrighted work and when it was created, the better.
When people talk about plagiarism, they’re usually referring to using someone else’s original work as their own. And in the context of copyrights, that is called piracy or copyright infringement, which can lead to hefty fines and civil judgments!
PRO TIP: To help protect your business against accidental copyright infringement, you should consider getting some business insurance, which we’ll cover in the next section.
If you use someone’s work, even just a part of it, as the basis of your own work, that usually constitutes a type of derivative work, which still requires the original copyright holder’s permission! Generally speaking, you would have to substantially change the original work beyond recognition, if you want to use someone else’s work without permission… but there are lots of special rules about that!
The concept of fair use allows you to use copyrighted works without permission, but only under very specific conditions. For example, you might be able to use copyrighted material for things like free speech, commentary, news, teaching, research, parody, or criticism. If this is something that applies to what you plan to do with your business, I highly recommend you do some research on the US Copyright Office website.
So, you need to be careful about how you use other people’s text, images, videos, quotes, and articles on your own website. Make sure you are allowed to use those works.
What is a patent?
A patent is a right granted by the US Patent office that protects unique inventions, processes, and discoveries. You must apply for a patent… they are not automatically granted to you.
Patents come in three flavors: design patents, utility patents, and plant patents (yep, actual real-life plants 🌱).
Once granted their patent, patent owners can allow other businesses to use their design or invention for a fee, or prohibit businesses from using their patent altogether.
Patents are public knowledge. However, some businesses might choose not to patent a design or invention but instead keep it secret so that only their own business knows about it. These confidential types of designs and inventions are not patented and are known as trade secrets.
What is a trademark?
Trademarks are often confused for copyrights, but they are quite different. A trademark is how people recognize your particular product or service. It can be a logo, design, word, phrase, or mixture of them that applies to your industry in your geographic business location.
You can register for a trademark at both the state level and the federal level.
When a trademark is used for a service, it is called a service mark.
The trademark symbol is denoted as ™ or TM, while the service mark is shown as SM.
Trademarks can help protect your brand and fight fraud and deception. With a trademark, you’re telling people how your product or service should be identified so that your messaging to customers is consistent and clear. If someone else creates a similar logo, design, word, or phrase that competes with you in your industry, you can protect your brand with a trademark.
A registered trademark is an even more powerful type of trademark that applies beyond the geographic area where you provide your goods or services. That’s right… with a federally registered trademark, you go nationwide!
A registered trademark is shown as ®.
Need some help with patents and trademarks?
Trying to figure out if you should file for a patent or a trademark for your new company?
I know I sound like a broken record, but you know those all-in-one business service companies I keep mentioning (e.g. Northwest)? Yep, some of them can also help you with filing for patents and trademarks! 😊
Why do you need business insurance?
There are several types of business insurance that can be especially handy for startup online businesses.
Sometimes you might unintentionally or accidentally infringe on someone’s copyright. In these cases, it can help to have some extra protection in the form of business insurance. In particular, this type of insurance is called Professional Liability Insurance.
Professional liability insurance is sometimes known by other names or highly related to these:
In addition to giving you some copyright infringement protection, professional liability insurance can protect your business against things like giving bad advice and misrepresentation.
Another common type of business insurance is called General Liability Insurance. This type of insurance protects your business assets against business injury and negligence claims.
Commercial general liability insurance also covers things like bodily injuries, property damage, and legal expenses.
Cyber Insurance is another common insurance that protects your business against security breaches, data loss, fraud, and similar issues that can arise in a digital online business.
Workers Compensation Insurance is an insurance policy that might actually be required by your state for your business, depending on your business structure, location, and the type of business you are creating. If you are a solo proprietorship, you likely do not need workers’ compensation insurance. Basically, this insurance protects you when your employees get injured.
There are a bunch of other types of insurance that you might be interested in, such as insurance for key people in your business. So make sure to explore the various insurance policies that your insurance broker offers.
Looking for an insurance company to help you with your business? Well, here are some business insurance services that can help you out with your startup:
Business Insurance Services
Which accounting software should you use?
After you set up your banking account, you should determine how you will keep track of your business income, expenses, assets, liabilities, and profit. This is usually done through business accounting and bookkeeping software.
PRO TIP: We will talk about customer payment processing tools in much more detail in a later step when we are actually setting up your website.
When you’re dealing with finances for your business, you should really take a professional and streamlined approach, rather than writing things on paper or using simple spreadsheets.
Here are some features you should be looking for when considering which accounting software to use:
PRO TIP: The last step in this series about how to create your online business talks more about taxes, and we’ll go over all of the tax ins and outs in that article.
If you don’t already have accounting software that meets your needs, you might want to consider these services below:
How do you get money to start and run your business?
Depending on the type of business you plan to launch and your business goals, you might need help with funding.
PRO TIP: You can use the business plan you created in the previous step to help secure funding.
There are several ways to raise capital to start or run your startup. Each one might have tax or legal ramifications… so make sure to get some professional tax advice no matter which choice you make.
- 💰 Self-Funding: It’s what it sounds like… you invest your own personal money (or money from your family or friends) to start up your new business.
- 💰 Loans: Loans can come in all shapes and sizes, including standard business loans, small business administration (SBA) loans, micro-loans for small amounts of money, and short-term loans for money that you’ll pay back quickly. Banks, organizations, and individuals can all loan you money, but those loans usually require you to pay back the money on a schedule over time with interest.
Depending on your business setup, you might be able to use a personal loan to fund your business; otherwise, you would need to get a loan specific to your business, which might require that your business has been successfully running for a while already.
- 💰 Business Credit Cards: One way to fund your startup would be to sign up for one or more business credit cards, and then charge all of your expenses on those cards. Watch out! 👀 Although credit card companies might require you to pay only a tiny amount back per month, their interest rates on remaining balances can be astronomical! If you go this route, make sure that you find a card that has little or no interest for a period, and that you have a plan to pay off the credit card balances completely in a short period of time.
- 💰 Lines of Credit: A business line of credit sort of acts like a business credit card. It is a revolving line of credit that banks allow you to draw from as needed for your business. Business lines of credit are usually meant for larger purchases than you’d charge on a credit card, and they have lower interest rates.
- 💰 Venture Capital: If you’re creating a big business and you’re willing to let go of part of your ownership or profits in your company, you might like to use a venture capitalist, who will invest large amounts of money into your business in exchange for a piece of the pie. Venture capitalists will likely become co-owners in your company.
- 💰 Angel Investors: If you like the idea of venture capital, but you’re just creating a small business and need only a relatively small amount of money, then perhaps you’d like to get an angel investor. Angel investors will also take part of your business, but they are more suited for startups, with funding say up to $100k.
- 💰 Crowdfunding: If you like the idea of investors, but don’t like the idea of giving up ownership of your company, you might like to check out crowdfunding. With crowdfunding, such as GoFundMe or Kickstarter, you ask lots of people to back your startup, in exchange for some sort of reward. Rewards can be things like products, services, invitations to private events, and things like that.
The crowdfunding platform will usually take a percentage of the money you receive from your backers. If you go this route, make sure to carefully project the costs of your rewards (including shipping!) and platform fees so that you make sure to make money in the end!
- 💰 Grants: You should definitely keep your eyes peeled for any business grants you might be eligible for. 🤷♂️ Why? Because grants are free money that you’re not required to pay back! 😍 Here are some places you might want to research for possible grants for your business:
PRO TIP: Some lenders won’t offer business loans to sole proprietorships or to startups unless they’ve been in business for a certain amount of time. If you find this is the case, you should look into their personal loan products, since they might allow you to use a personal loan for starting or funding a new business.
You might be able to get business financing directly through your existing bank. Otherwise, here are some companies that offer various types of personal and business financing options.
Moving on to set up your products!
Congrats! If you got through all of the sections above, you’re well on your way to starting your new business.
You should now have all of your company’s infrastructure in place to support your new online business venture.
Next up, dive into setting up your business products and services to get them ready to sell!