Do You Need a Business License to Sell on Shopify
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Many new Shopify merchants hesitate to open a Shopify store because they are afraid of getting into trouble with the law. Since selling online is relatively new, not all people are sure of what they should or should not do.
In this article, NextSky will help you find out whether you need a Business License to sell on Shopify.
What Is a Business License?
A business license is a legal document issued by a government authority that grants permission to operate a business within a specific jurisdiction. It ensures that your business complies with local laws and regulations and is typically required for businesses that sell products or services.
The type of business license you need may depend on factors like your business structure (e.g., LLC or sole proprietorship), location, and the nature of your business.
For example, a brick-and-mortar store might need a local business license to operate legally in a city or town, while an online business might need state-level permits, particularly if it plans to collect sales tax. In short, a business license is the government’s way of tracking businesses to ensure they operate safely and lawfully within their jurisdiction.
The Importance of Understanding Local Regulations
When selling on Shopify or any other platform, understanding local regulations is critical to ensuring your business operates legally and avoids fines or penalties.
Each region—whether it's a city, state, or country—has its own set of rules and requirements that businesses must follow. This could range from obtaining specific permits, collecting and reporting sales tax, or adhering to health and safety standards if you're selling physical products
Failing to comply with local regulations could result in costly fines, disruptions to your business, or even having your store shut down.
For example, some areas require a business license, while others might mandate certain health or safety certifications depending on what you're selling. Additionally, tax regulations can vary significantly by state, particularly when it comes to collecting sales tax from online customers.
You Might Still Need to Pay Sales Tax
Even if you don’t need a business license to sell on Shopify, you are still likely required to collect and pay sales tax. Sales tax is a government-imposed tax on goods and services, and it varies depending on where your business operates and where your customers are located.
The obligation to collect sales tax often depends on your tax nexus, which refers to the connection between your business and a specific state or jurisdiction. If your business has a physical presence (such as an office or warehouse) in a state, or if you exceed a certain number of sales or revenue in that state, you’ll likely be required to collect sales tax from customers there.
It's important to be aware of your sales tax responsibilities as these requirements can expand as your business grows and reaches customers in different locations. Using tools like Shopify Tax can simplify the process by automatically calculating the correct tax rates based on your customers’ locations and your business’s nexus. Staying compliant with sales tax regulations is key to avoiding penalties and ensuring your business operates smoothly.
Business Licenses for LLCs or Sole Proprietorships on Shopify
Whether you’re running a LLC (Limited Liability Company) or a sole proprietorship (where you run the business under your own name), the requirements to sell on Shopify are basically the same. Both types of businesses need to meet local rules like getting a business license if required.
Having an LLC can sometimes make things easier when setting up your Shopify account. For example, you can use your official business name and EIN (Employer Identification Number), which is useful for business recognition and tax purposes. If you decide to switch from being a sole proprietor to forming an LLC, you'll get an EIN and can use that for your Shopify store.
If you're a sole proprietor, that’s fine too! You can still run a Shopify store successfully. One thing to consider is filing for a DBA (Doing Business As) if you want to operate under a different name than your personal one. It allows you to have a business name even if you're not an LLC.
Lastly, sole proprietors need to keep track of 1099 tax forms. Shopify will send these forms if you’re earning money as a contractor or freelancer. You'll use this form to report your income when you file your taxes.
Do You Need a Business License to Dropship on Shopify
Technically, you don’t need a business license to start a dropshipping business on Shopify. Shopify allows individuals to set up stores and sell products without needing a business license during the initial stages.Â
However, just because Shopify doesn’t require a business license doesn’t mean you won’t need one based on your location and local laws. You need to get a business license to dropship on Shopify if:
- You earn more than $20,000 per month.
- You store and regulate products from your house.
- You selling a product that requires a professional or government license.
Do You Need a Seller’s Permit to Sell on Shopify
Yes, while Shopify itself doesn’t require you to have a seller’s permit, local and state laws likely do if you’re selling taxable goods. Be sure to check your state’s regulations and obtain the necessary permits to operate your Shopify store legally.
A seller’s permit (also known as a sales tax permit or resale certificate) allows you to collect sales tax from customers. It’s typically required by state or local governments if you sell taxable goods or services.
If your business operates in a state that requires sales tax collection, you’ll likely need to obtain a seller’s permit. This permit allows you to legally collect sales tax on purchases made by customers in your state and then remit that tax to the government. Even if you sell online, states where you have a nexus (physical presence or significant sales) might require you to collect sales tax.
Without a seller’s permit, you may not be compliant with tax laws, and failing to collect and remit sales tax can result in penalties or fines.
How to Obtain a Bussiness License
Form Your Business Entity
Before applying for a business license, you should establish your business structure (LLC, sole proprietorship, etc.). This ensures you won’t need to reapply later if your structure changes. Common structures for small businesses include LLCs, corporations, and sole proprietorships.
Apply for an Employer Tax Identification Number (TIN)
Most businesses need a TIN (also known as an EIN) from the IRS, except sole proprietors without employees who can use their Social Security Number (SSN). You can easily apply for an EIN through the IRS website.
Determine Which Licenses You Need
The types of licenses required depend on federal, state, and local regulations and the kind of business you’re operating. You can learn about the necessary licenses through state agencies like the Secretary of State office or by consulting a business lawyer.
Apply for a Business License
File for any necessary licenses with state, county, or municipal agencies. This could include a sales tax permit, health permits, or city planning permits, depending on your industry. Many states offer step-by-step online guides for applying, streamlining the process.
Renew Your Business License
Business licenses need to be renewed regularly—typically annually or every few years. Keep track of expiration dates and renewal requirements to avoid interruptions in your business operations.
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