Do You Need A Business License to Sell on Shopify?
A business license is sometimes necessary. This is true for both online stores and a brick-and-mortar operations. In the vast majority of cases, these licenses are for tax purposes. Always remember that if you’re making money, the government is as well. That’s just the cost of doing business, and the more money you make the bigger the government’s cut. Essentially, most business licenses allow the government to keep track of tax revenue. If you don’t take the time to get the proper licenses, you may be fined. Plus, you may have to suspend sales until you complete the necessary paperwork. So let’s go over if you need a business license to sell on Shopify.
What Is a Business License?
A business license, also known as a business operation license, lets your e-commerce or Shopify store do business in the city, county, or state. Some online businesses need a version of this license to legally operate. However, in other cases it’s not necessary. That being said, it may be a good idea to still get the necessary licensing, especially if you’re going to be making large profits and will have to pay lots of taxes to state and federal tax authorities.
You will typically need to renew your business license annually. E-commerce licenses don’t differ significantly from brick-and-mortar business licenses.
Regulations and how to register for a business operation license vary from place to place, so contact City Hall or check your state’s Secretary of State website to find and apply for the correct license. Requirements for obtaining these licenses are usually easy (you may have to pay a small fee).
Make sure to check whether your Business Operation License needs to be renewed—operating a business with an expired license can result in fees or fines.
Do You Need a Business License for Your Shopify Store?
In most cases, you don’t need a business license for your Shopify store. There are a few exceptions:
- You’re selling federally regulated products like alcoholic beverages, animal products, or firearms.
- You use the Shopify payment gateway.
- You’re earning over $20,000 in a month.
Notice that if you’re selling regular groceries or home products, then no, you don’t need a business license for your Shopify store. However, it may still be a good idea to check your local state licensing or legislation office or the Small Business Administration (SBA) to see what licenses may still apply.
In other words, it’s always good to doublecheck!
Do You Need A Business License To Dropship on Shopify?
Dropshipping on Shopify is functionally the same as having a Shopify store. As a result, the same rules apply regarding having a business license for your e-commerce store. In other words, you don’t need one unless you meet one of the three criteria, but in some cases it might be a good idea to apply for a state or federal business license. Again, it’s always a good idea to check your local state licensing or legislation office as well as the Small Business Administration (SBA).
What Are the Different Types of Business Licenses for Online Stores?
Now that we’ve established that most Shopify stores don’t require a business license, let’s still go over the different types of licenses. Depending on your location and the nature of your work, you may need a mix of licenses and permits at the federal, state, county, and municipal levels to open and run an online business. These include registration for small business taxes.
Following are the main license types you’ll need to consider when operating an online business:
Also known as sales tax permit or sales and use tax permit. This is a specific type of business licence required for businesses that sell taxable goods or services. The seller’s permit is required so that your e-commerce business can collect and remit state sales tax.
Alaska, Delaware, Montana, New Hampshire, and Oregon have no state sales tax (seller’s permit not necessary there). Of the other 45 states with sales tax, all of them (except Florida and Missouri) require online sellers to get a seller’s permit.
In most states, this condition only applies to stores with sales of at least 100k or 200 transactions within the state. Exceptions are Oklahoma, which has a 10k requirement, and Kansas, which requires all remote sellers to have the seller’s permit, from the very first sale onward.
Also known as a resale certificate. If you buy products and/or materials for resale to consumers, this permit might be necessary. When buying something in bulk for resale, you must present this permit to the vendor to get a tax-free sale. This is because the vendor reports sale to state or federal tax authorities. Essentially, a reseller’s permit keeps e-commerce business owners from having to pay taxes twice on goods.
As a dropshipping supplier and wholesaler, GreenDropShip requires a resale certificate from resellers before they become a member. This is not the same as a general business license, and it is necessary if you want to use GreenDropShip as your supplier for your online store (or dropshipping store) on Shopify.
General business license
Depending on the state, your e-commerce business may require a general business license. Additionally, you may need a business license at county and/or municipal level. For instance, some cities require businesses that are based at home to get a home occupation permit/certificate of occupancy. Again, this varies from jurisdiction to jurisdiction.
Employer Identification Number (EIN)
All businesses need a federal Employer Identification Number (EIN). This is for tax purposes. It’s easy to get – you can register in minutes on the website for the Internal Revenue Service (IRS). If you employ people, you will need to register for employer withholding tax in the jurisdictions where they work. Plus, you may also need to register with the state unemployment office and/or worker’s compensation.
Finally, if you’re a sole proprietor (you have no employees), you can use your Social Security Number for tax identification. For the purposes of employment taxes, contract employees (freelancers) do not count as taxable employees.
Do You Need A Business License If You Turn Your Home Into A Business?
If your e-commerce business or Shopify store are based out of your home, then you may need to secure additional permits if:
- A large number of employees and/or customers come to your home
- Making changes to show that it’s a commercial space (hanging a sign)
- You store a lot of inventory (your house/garage double as your warehouse)
- Shipping carriers frequently come to pick packages up
- There are significant nuisances like noise or odor
Many of these don’t apply to e-commerce storeowners, including Shopify stores. If you sell online (via Shopify/Amazon/BigCommerce/WooCommerce), you won’t have customers coming to your home. However, you’ll likely have numerous carrier pickups (since your home is doubling as your fulfillment center) and you may need a permit if you store lots of inventory.
Of course, this does not apply if you are using the e-commerce platforms to dropship. Remember, with dropshipping, your supplier handles the logistics of storing, packing, and shipping the products to the end customer. This means that they’re running the fulfillment center while you focus on marketing.
Why Is It A Good Idea To Get A Business License Anyways?
We’ve established that you don’t need a license for your Shopify store (unless you meet one of the three criteria). That’s great news! However, we did mention that it’s still a good idea in some cases, especially if you’re pulling in a lot of profit. Let’s go over the three primary reasons:
- Taxes – This is a big one. Remember, always pay your taxes – we cannot stress this enough. If you don’t, you may be subject to extensive penalties and even criminal charges. That being said, you can also save a lot of money on tax write-offs, and you’ll need to have a real, registered business to take advantage of the tax code for businesses.
- Liability – Getting a business license helps to lessen your liability. Registering as an LLC or an S Corp (or the equivalent for your country or state) limits your personal liability for any products sold through your online storefront.
- Legitimacy – If your goal is to build meaningful relationships with trusted suppliers, you need to show them you are trustworthy yourself. No reputable brand is going to work with you if you don’t seem like a legitimate business. Being registered as an LLC or S Corp shows suppliers you are worthwhile and serious about your business.
As you can see, even if you don’t need a business license, it might still be a good idea to get one. This is especially true if you’re expecting to make serious profit running your online store and possibly even making it your primary source of income.
How To Register Your Online Business
Let’s say you’ve decided to register your online business so that you can be prepared in case it really takes off. Here are the following steps you need to take to register your online business once you’re making a profit:
- Choose a Business Structure – You have different options. The most common for e-commerce businesses are a sole proprietorship, a partnership, or a limited liability company (LLC). These structures have differences related to how taxes are calculated and paid, as well as concerns such as profit-sharing and liability with business partners.
- Register a “Doing Business As” (DBA) Name – Legally, any business name other than the given name of the owner has to be registered with local authorities. LLCs and corporations include the name selection as part of the overall paperwork. Sole proprietorships and partnerships need to file a specific form with their local government to register a name; otherwise it defaults to the name of the owner or owners. This assumed business name is often called the “doing business as” or DBA name. The legal name is needed for tax paperwork, licenses, permits and other government forms.
- Get a Federal Tax ID – Also known as an employer identification number (EIN). Sole proprietorships with no employees don’t need a federal tax ID number from the IRS, but corporations, LLCs and partnerships do. The federal tax ID number designates a business, and is useful for keeping personal and business taxes and finances separate.
- Get a Sales Tax ID – There are tax obligations on the state and local levels for the vast majority of ecommerce businesses. New ventures need to register with their state’s revenue office, and in some states may also have to apply for a permit to collect sales tax.
As you can see, paying taxes is an inevitable part of making money in any business venture. Remember, e-commerce is no different than a brick-and-mortar retail operation – if you make money, then Uncle Sam is going to want their cut. Depending on the type of business structure you choose, your tax obligations may vary wildly.
Business License Rules and Regulations Vary from State to State
This may seem obvious, but it’s important to point out. That’s why it’s so important to check with your local licensing or legislation office. For instance, in California you may need a seller’s permit (to collect sales tax). Plus, if you’re an entity, you’ll need to incorporate or organize with the California Secretary of State.
In some cases, city codes may also apply. For example, in Los Angeles, you may need a business license if you are operating out of a commercial space. However, most Shopify store owners avoid this – in fact, this is one of the major benefits of having a Shopify store. You can avoid these kinds of business expenses!
For reseller’s permits (resale certificates), not every state issues them. Additionally, out-of-state vendors may accept your home state reseller’s permit, or you may have to fill out a separate form using your taxpayer identification number (TIN). Alabama, California, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Washington, and the District of Columbia do not accept out-of-state resale certificates.
For general business licenses, Alaska, Delaware, Nevada, Tennessee and Washington give statewide general business licenses. Again, it is unlikely that you’ll need these for a Shopify store.
To start a business in California as an entity, you’re required to file for a Doing Business As (DBA) name and get a resale permit. You’ll also need to buy space in a local newspaper and run a 4-week announcement about your DBA name. If you move to a different part of California, your licensing requirements may drastically change. In LA, you likely won’t need a standard business license if you don’t sell restricted products. Remember, these rules only apply if you aren’t selling under your own name – in those cases, you won’t need to file for a DBA.
How To Get a Seller’s Permit or Resale Certificate
You can usually get a seller’s permit by mail for minimal or no fees. Submit an application to your state revenue department with the following information:
- Federal Tax ID numbers
- Address of your office/HQ
- State of residence
For your reseller’s permit (resale certificate), apply through your state’s Department of Revenue. However, some states do not issue a separate reseller’s permit – instead, they rely on your sales tax identification number. You’ll have to check the website and/or call the Department of Revenue in the state where you’re commercially based. It’s for this reason that it’s so crucial to have your business address or headquarters location finalized.
Once you have your resale certificate, then you can become a member of GreenDropShip. We integrate seamlessly with any Shopify store and you can use us as either a dropshipping supplier or a wholesaler. Of course, if you order in bulk from us, that means you have to handle the logistics of inventory management. If you decide to have a dropshipping store on Shopify, then we’ll handle that part of the process.