How to Start an Online Business: Licenses, Taxes, and Legal Requirements (2026 Guide)

1. The licenses every online business needs

There is no such thing as a federal "online business license" or a special state internet commerce license. What exists is the same licensing framework that applies to all businesses — just applied to your situation.

General business license

Required in most U.S. cities and counties for any business operating from that address. If you're running your online business from your home in Austin, you need an Austin business license. If you're in unincorporated Los Angeles County, you need a county business license. Annual cost: $20–$100. Apply at your city or county clerk's office or online through their portal. This is the most commonly missed requirement for online business owners.

Home occupation permit

Many cities require a home occupation permit on top of the business license for businesses operating from a residence. This confirms your business activity is compatible with residential zoning — that you're not running a manufacturing operation, storing hazardous materials, or generating commercial traffic in a residential neighborhood. For a typical online business with no customer visits, approval is usually straightforward. Cost: $25–$75, one-time or annual.

EIN (Employer Identification Number)

An EIN is your business's federal tax ID, issued free by the IRS at irs.gov. Required if you form an LLC or corporation, have employees, or operate as a partnership. Recommended for all sole proprietors too — it lets you use a business tax ID on vendor forms and payment processors instead of your Social Security number. Apply online and receive your EIN immediately.

Seller's permit / sales tax permit

Required in most states if you sell taxable products or services. This authorizes you to collect sales tax from customers. Getting a seller's permit is typically free and fast — apply through your state's Department of Revenue or Taxation. If you sell products and you're in a sales-tax state (all except Oregon, New Hampshire, Montana, Delaware, and Alaska at the state level), this is not optional.

2. Business structure: sole proprietor vs. LLC

You can operate as a sole proprietor without any formation filing — just use your own name and SSN. But there are real reasons to form an LLC:

• Liability protection: An LLC separates your personal assets from business debts and lawsuits. If a customer sues your online business, your personal savings aren't on the table.
• Professional credibility: Many payment processors, wholesale suppliers, and affiliate programs prefer or require a formal business entity.
• Tax flexibility: LLCs can elect to be taxed as an S-Corp once income reaches a level where the self-employment tax savings justify the administrative cost (typically around $40,000–$50,000+ in net profit).
• Banking: Business bank accounts — which help maintain the liability protection — are easier to open with an LLC and EIN than as a sole proprietor.

State LLC filing fees range from $50 (Colorado, Kentucky) to $500 (Massachusetts). Annual report fees vary by state. Most single-member LLC owners just file a Schedule C with their personal tax return — no separate business tax return required.

One additional requirement since January 1, 2024: most new LLCs and corporations must file a Beneficial Ownership Information (BOI) report with FinCEN within 90 days of formation. This is a federal anti-money-laundering requirement. Failure to file carries civil penalties of $500/day. File free at fincen.gov/boi.

3. Sales tax for online sellers: what post-Wayfair actually means

The 2018 Supreme Court decision South Dakota v. Wayfair fundamentally changed online sales tax. Before Wayfair, states could only require sales tax collection from sellers with a physical presence in the state. After Wayfair, states can require collection from any seller who exceeds their economic nexus threshold — typically $100,000 in sales or 200 transactions in a calendar year.

What this means for your online business:

• In your home state: Register for a seller's permit immediately if you sell taxable products. Doesn't matter how small your revenue is.
• In other states: Once you hit the $100K / 200-transaction threshold in a state, you must register for sales tax there, collect it, and remit it. Most small online businesses don't hit nexus in multiple states until they reach $300K–$500K in annual revenue.
• Marketplace facilitators: If you sell through Amazon, Etsy, eBay, or Shopify (using Shopify's marketplace facilitator services), these platforms collect and remit sales tax in most states on your behalf. But you may still need to register in your home state.
• Digital products: About 20+ states now tax digital products — SaaS, digital downloads, streaming services. If you sell software, e-books, or online courses, check whether your state and states where you have nexus tax your specific product type.

Sales tax compliance software (TaxJar, Avalara) automates nexus tracking and filing for $20–$100/month. Worth it once you're selling in multiple states.

4. Requirements by online business type

The specific licenses and permits you need beyond the basics depend on what your business actually does.

E-commerce (physical products)

Business license + seller's permit + sales tax compliance + EIN. If you import goods, watch for customs and CBP compliance. If you sell food products, FDA registration may be required. If you sell products subject to FDA, CPSC, or FTC regulation (supplements, cosmetics, children's toys), product-specific compliance applies regardless of whether you sell online or offline.

Dropshipping

Same requirements as e-commerce, even though you don't hold inventory. You're still the seller of record for tax purposes. The supplier-retailer relationship doesn't change your state registration or tax collection obligations. See our dropshipping licensing guide for full details.

Online services and consulting

Business license + EIN. Services are not taxable in most states (though about 20 states tax at least some services). Professional services — law, accounting, financial advising, mental health — require the same state professional licenses online as offline. You can't give legal advice online without a bar license. You can't provide mental health counseling online without a state clinical license. The medium doesn't change the professional licensing requirement.

Online courses and coaching

Business license + EIN. No specialized license for general coaching or course creation. However: health coaches making specific medical claims, financial coaches giving investment advice, and legal coaches straying into legal advice all face professional licensing requirements and FTC enforcement risk. Keep your marketing claims within what you can legally substantiate.

SaaS and software

Business license + EIN. If you sell to businesses, many B2B SaaS buyers will require a W-9 and may want proof of business formation. Sales tax on SaaS varies by state — some states exempt SaaS entirely, others tax it at full rates, and some tax SaaS but not custom software. This is an area where getting it right from the start matters; retroactive sales tax assessments are painful.

Affiliate marketing and content publishing

Business license + EIN. FTC rules require clear disclosure of affiliate relationships and material connections. The FTC's updated endorsement guides (2023) extend disclosure requirements to social media, reviews, and any content where there's a material connection to what you're promoting. Non-disclosure can result in FTC enforcement action.

Online food business (cottage food, meal prep)

Business license + food handler certification + compliance with your state's cottage food law (for home production). Most cottage food laws restrict sales to direct-to-consumer only — shipping food products across state lines triggers FDA and interstate commerce rules that override state cottage food exemptions. See our catering and food business guide.

5. Federal privacy and data compliance

Online businesses collect personal data — and federal and state laws set rules for how you handle it. Most small online businesses aren't randomly targeted for enforcement, but violations can trigger complaints, class actions, and regulatory scrutiny.

CCPA (California Consumer Privacy Act)

Applies to for-profit businesses that collect personal data from California residents and meet one of three thresholds: annual gross revenue over $25M, buy/sell personal data of 100,000+ consumers per year, or derive 50%+ of revenue from selling personal data. Most small online businesses fall below these thresholds. But if you're in that range, CCPA compliance requires a privacy policy, opt-out rights for data sales, and a data deletion process.

COPPA (Children's Online Privacy Protection Act)

Applies if your site or app is directed to children under 13, or if you know you're collecting personal data from a child under 13. COPPA requires verifiable parental consent before collecting any personal data from minors. FTC enforcement here is active — violations have resulted in multi-million-dollar penalties against both large platforms and small operators.

CAN-SPAM Act

Governs commercial email. Requirements: your physical mailing address must be included in every commercial email, subject lines can't be deceptive, you must honor opt-out requests within 10 business days, and opt-out mechanisms must be easy to find and functional. Penalties up to $50,120 per email in violation. Most email service providers (Mailchimp, ConvertKit, etc.) build CAN-SPAM compliance into their platform — but you're still legally responsible.

FTC Safeguards Rule

Applies to "financial institutions" under the Gramm-Leach-Bliley Act — which the FTC defines broadly to include businesses that provide financial services or collect financial data. If you operate a tax prep business, bookkeeping service, mortgage broker, or any business that handles customer financial records online, the Safeguards Rule requires a written information security program. Effective for most covered businesses since June 2023.

6. Step-by-step launch checklist

1. Choose a business name and check availability in your state's business entity database. If you want trademark protection, run a USPTO search.
2. Form your entity (LLC recommended). File with your Secretary of State online. Costs $50–$500 depending on state.
3. Get your EIN from the IRS at irs.gov. Free, immediate online issuance.
4. File BOI report with FinCEN within 90 days of formation (new LLCs and corporations only). Free at fincen.gov/boi.
5. Get your general business license from your city or county. $20–$100/year.
6. Get a home occupation permit if required by your city (many do require it for home-based businesses).
7. Register for a seller's permit if you sell taxable products or services.
8. Open a business bank account using your EIN and formation documents. Keeps personal and business finances separate — critical for LLC liability protection.
9. Set up sales tax collection for your home state. Add multi-state once you hit nexus thresholds.
10. Post a privacy policy on your website disclosing what data you collect and how you use it.

7. Startup cost breakdown

A service-based online business (coaching, consulting, freelancing) can complete all required filings for under $500 in most states. Product-based businesses add the cost of sales tax software as they scale.

Frequently asked questions

Do I need a business license to sell things online?

In most cases, yes. The majority of U.S. cities and counties require a general business license for any business operating from that address — including online businesses run from your home. You don't need a separate "online business license" or a license from your state just because you sell online, but the basic business license requirement still applies. Cost is typically $20–$100/year, applied for at your city or county clerk's office.

Do I need a seller's permit to sell online?

If you're selling physical products online, yes — you need a seller's permit (also called a sales tax permit or reseller's permit) in your home state. This authorizes you to collect sales tax from customers in your state. Getting one is usually free and takes a few days. After South Dakota v. Wayfair (2018), you may also need to register for sales tax in other states where your sales exceed economic nexus thresholds (typically $100,000 in sales or 200 transactions). Selling services is more complex — most states tax some services and not others.

What is economic nexus and does it apply to me?

Economic nexus means you have a tax collection obligation in a state where you do enough business — even without a physical presence. Since the Supreme Court's 2018 Wayfair decision, all 46 sales-tax states can impose collection obligations on out-of-state sellers. Most states set the threshold at $100,000 in sales or 200 transactions in a calendar year. If you hit that threshold in any state, you must register for sales tax there, collect it from customers in that state, and remit it. This applies to product sellers; service sellers have separate nexus rules.

Do I need an LLC for an online business?

You don't legally need an LLC to operate an online business — you can operate as a sole proprietor. But an LLC provides personal liability protection, which matters if your business could face a lawsuit, a customer dispute, or a debt claim. Single-member LLCs are taxed like sole proprietors (pass-through), so there's no extra tax complexity. State filing fees range from $50 (Kentucky, Colorado) to $500 (Massachusetts). If you're generating real revenue or you have any IP worth protecting, the LLC is worth the cost.

What federal taxes does an online business owe?

As a sole proprietor or single-member LLC, you pay: (1) Federal income tax on net profit, (2) Self-employment tax (15.3% on first $168,600 of net earnings in 2024), and (3) Quarterly estimated tax payments if you expect to owe $1,000+ in taxes for the year. If you form an S-Corp (possible after LLC formation), you can split income between salary and distributions, potentially reducing self-employment tax — but this requires payroll setup and has its own costs. You can deduct legitimate business expenses: software, advertising, professional services, home office (if used exclusively for business), and equipment.

What licenses does a specific type of online business need?

Requirements depend heavily on what your business does. Online retailers need a seller's permit and potentially multi-state sales tax registration. Online coaches and consultants need only a business license in most states, though financial advisors and certain health coaches may need professional licensing. Online marketplaces face FTC disclosure rules for affiliate income. SaaS businesses selling to consumers need to consider state digital product tax laws (20+ states now tax SaaS). Online food businesses may need food handler permits and cottage food law compliance. The general rule: if an offline version of your business requires a license, the online version probably does too.

What privacy and data compliance applies to online businesses?

Depends on your customers and data. If you collect any personal data from California residents, you may be subject to CCPA (California Consumer Privacy Act). If you market to children under 13, COPPA (Children's Online Privacy Protection Act) applies — with significant penalties for violations. If you handle financial data, the FTC Safeguards Rule requires a written data security program. If you send marketing emails, CAN-SPAM sets requirements for opt-out mechanisms, physical addresses, and honest subject lines. A basic privacy policy is a practical necessity for any online business.

How do I find the exact permit requirements for my business and location?

Online business permit requirements vary by business type, state, and city. For the specific licenses, agencies, and application links for your online business in your location, use the StartPermit free permit finder.

Official Sources

• SBA: Register Your Business
• IRS: Small Business and Self-Employed Tax Center
• IRS: Employer Identification Number
• FTC: Safeguards Rule
• Streamlined Sales Tax Governing Board
• FTC: CAN-SPAM Act Compliance Guide