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page title icon Legal Issues in Starting an Online Business

Succeeding as an online entrepreneur takes a lot of learning, determination, hard work, and most importantly, money. But while it’s challenging to start and grow a business, things can get even more difficult if you get stuck in lawsuits before your business even finds its feet. Knowing the legalities of starting an online business can help prevent such complications, and that’s what will be the subject of today’s post.

In a nutshell, the most critical legal issues in starting an online business include understanding website design and development contracts, ensuring compliance with data protection regulations, figuring out your taxes, domain name acquisition and protection, and drafting terms of use agreements.

These are just the highlights, so be sure to read to the end for details on the above and many more legal considerations when starting an online business.

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Understanding Website Design and Development Contracts

Setting up a website is one of the most critical requirements for starting an online business. And with so many options available, it’s easier to set up your website than ever.

Generally, there are two ways you can go about setting up a website for your online business. You can either design one from scratch using free drag and drop editors like Wix or outsource to a professional web designer and developer.

Now, with most free/cheap drag-and-drop website builders, you get what you pay for (or don’t). Unless you’re highly experienced in web design, you’ll likely end up with a poorly designed website if you use such builders, which will reflect poorly on your business and probably drive potential customers away.

So if you’re serious about your business, you’ll want to pay someone to create a professional-looking website for you.

This is where website contracts come in.

When you engage most professional website designers or developers, there’s always a contract involved. Usually, this contract comes with the service provider’s terms and conditions, which are legally binding. Thus, it’s crucial that you carefully read the fine print and fully understand the terms and conditions before signing anything.

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Trademarks, Patents, and Copyrights

There have always been misconceptions surrounding what these three words mean, and the many regulations governing each don’t help the situation. Regardless, it’s critical for anyone looking to sell anything online to understand their meanings and the laws governing each to prevent legal complications.

Here’s how the US Patent and Trademark Office defines copyrights, patents, and trademarks:

  • Trademarks: This refers to any symbol, phrase, word, or design that distinguishes the source of one entity’s goods from the rest. A service mark shares the same definition, except it applies to services as opposed to tangible products. Commonly, the term “trademark” is thrown around to mean both service marks and trademarks.
  • Patents: This is a license granted to an individual to give them the legal rights to an invention for a limited period. Having a patent means you can legally prevent other people or companies from using, making, or selling your creation. In exchange for such rights, you’ll be required to disclose the invention publicly.
  • Copyrights: Copyright gives you the exclusive right to duplicate your creative work for a limited period, usually longer than that of a patent. Creative pieces that qualify for copyright protection may be musical, literary, artistic, or educational.

Understanding each of the above terms’ meanings is vital because it’ll help you determine the most appropriate way to protect your product(s).

Keep in mind that it’s not just the meaning of each term you need to know: you also need to familiarize yourself with each type of protection’s legal implications because the terms and conditions vary greatly. For instance, trademarks don’t expire, but the same can’t be said for copyrights and patents. Also, the products that qualify for each type of legal protection vary greatly.

Even if applying any of the above protections to your products isn’t a top priority, you need to ensure that your business isn’t infringing on those of other entities. Copyright, patent, and trademark infringements can mean lawsuits, so you need to be thorough when doing your research.

If things get complicated (and they likely will), involve a good lawyer.

Figuring Out Your Taxes

Taxes are always a tricky subject matter for any business, and internet startups aren’t any different. Generally, paying income and federal taxes is a standard requirement for all companies, including online ones.

But when it comes to sales taxes, things get complicated.

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While all businesses are traditionally expected to pay retail taxes as per state law, online companies can sometimes “fly under the radar,” particularly when they don’t also have a brick and mortar location. Some states have had special sales tax laws enacted to address internet-only business, while others like Oregon and Alaska don’t impose any sales tax.

As an aspiring owner of an online business, you’ll want to figure out beforehand whether your state levies sales tax. Some town and city jurisdictions do impose additional sales tax on top of the state retail tax, so you might want to also look into this when reviewing the sales tax laws in your state. California is one such state, with local districts levying additional sales taxes on top of the standard 7.25% state sales tax rate.

If your state or local jurisdiction imposes sales tax on online businesses, you need to collect it from your customers by working it into your prices.

To help you find out whether you’ll need to collect sales taxes, let’s take a look at the two fundamental principles that govern when an online company may be obligated to collect sales tax:

  • If an online business has a “nexus” or a physical presence such as a storefront, office, or warehouse in a state that levies sales taxes, it must collect applicable taxes for sales made in that state.
  • If an online business doesn’t have any form of physical presence, it’s generally not required to collect taxes for sales made online. With that said, a 2018 Supreme Court ruling implies that internet retailers may soon be legally obligated to collect sales taxes regardless of whether they have a physical presence.

A Sales tax nexus is one of the trickiest things to figure out for online sellers. Legally, the term refers to the level of intimacy an online business must have with a given area to be mandated to collect taxes for all online sales they make in that area.

Besides having a physical presence, several business activities may trigger a sales tax nexus. These include:

  • Economic activity. One of the critical implications of the 2018 supreme court ruling mentioned earlier is that it allows states to base a business’s obligation to collect sales taxes on the volume of transactions or sales. The official term for this is an economic nexus, and more than 43 states in the US have already enacted it.
  • Remote employees. While they’re one of the greatest assets for online businesses, remote employees can also be used as a basis for a sales tax nexus in some jurisdictions. In some states, having a telecommuting workforce, independent contractors, or even attending trade shows can be enough to establish a nexus.
  • Click through reward agreements. Having arrangements to reward individuals in a different state for referring (whether directly or indirectly) prospective customers via a website link or an in-state site may amount to click-through nexus.
  • Affiliate relationships. Suppose an online business has an affiliate relationship with another entity with an established nexus in a given taxing state. In that case, this can amount to a sales tax nexus for the former in the taxing state. For this purpose, an affiliate relationship includes conducting business on behalf of another entity.
  • Other activities. Business activities such as receiving referrals, advertising, and drop shipping, may also establish sales tax nexus.

Compliance With Data Protection Regulations

As an online business, you’ll be handling a lot of personal data, which needs protection. With the number of security breaches skyrocketing, consumer data protection has been put into sharp focus. Consumers are growing concerned about how online businesses handle their personal information. They are more likely to trust and do business with companies they believe are taking adequate measures to keep their data safe.

This trend was reflected in a 2017 PWC report, where one of the key findings was that consumers trust corporations less today than in the past. In the same survey, 88% of consumers admitted that how much of their personal information they’d be willing to share would depend on how much they trust a company. Meanwhile, a whopping 87% admitted that they’d stop doing business with any company they felt was handling their data irresponsibly.

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Indeed, consumer data protection is an important consideration when starting an online business, and you can ensure compliance by observing the following data security regulations:

PCI DSS

If you’re setting up to accept credit card payments, you’ll need to observe data security standards set by the PCI Security Standards Council. The Payment Card Industry Data Security Standards (PCI DSS) is the most critical of all. It seeks to increase cardholder data controls and minimize credit card fraud, and there are fines for non-compliance.

Most businesses treat PCI compliance as a once a year event. However, the reality is that it’s a continuous process composed of three key components. These include:

  • Assessment. The assessment aspect of PCI compliance encompasses identifying cardholder information, taking stock of all business processes and IT assets involved in card procession, and examining them for any vulnerabilities.
  • Remediation. Remediation entails addressing any vulnerabilities realized through assessment and getting rid of cardholder data storage unless deemed necessary.
  • Reporting. Reporting involves organizing and submitting the required reports to the acquiring bank and card brands.

ISO

The International Organization for Standardizations (ISO) has established several standards for businesses across industries internationally. These standards pertain to various aspects of the way an organization does business, from data security to management systems’ quality.

To be ISO certified for data security, your business needs to adhere to the ISO/IEC 27000 family of standards. This set of standards outlines the best practices for managing any data entrusted to a firm by a third party, from intellectual property to financial information.

Within that set is a subset of ISO/IEC 27001:2013, which outlines the requirements for designing, implementing, maintaining, and constantly improving information security management systems within an organization.

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The ISO/IEC 27001:2013 is the only auditable set of international standards for information security management systems. Getting certified for it can be a great way to show your customers and business associates that you’re committed to protecting any sensitive information they may entrust to your business.

GDPR

The General Data Protection Regulation (GDPR) is another type of regulations governing data and privacy protection. It’s meant to give consumers in the European Economic Area and the European Union greater control of their data and increase their data collection rights.

While its regulatory powers are confined within the EU and the EEA, the GDPR may apply to businesses that operate outside both regions if they transact with EU citizens.

Domain Name Acquisition and Protection

Acquiring a domain name goes hand-in-hand with website creation, but the potential legal issues that may arise from it warrant special attention. A domain name acts as a physical address for your business online. In the same way that your customers would need a zip code or street address to find your business if it had a physical location, they need a domain name to locate your website on the internet.

One of the most significant legal challenges you may face in domain acquisition is finding out that a different business or individual already owns the domain name corresponding to your business or product’s trademark name. In such cases, you can either opt for a different domain name or attempt to get the one that bears your business name/product trademark back from the current owner(s). Likely, the latter option will result in a legal dispute.

Once you’ve secured a domain name for your business, you’ll want to protect it from other parties that may try to capitalize on the goodwill associated with your brand. A great way to do that would be to register your domain name as a trademark or service mark, which is possible at both national and international levels as long as your domain name meets the various terms and conditions.

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Ensuring Compliance With Social Media Laws and Rules

Social media is arguably the most valuable asset for online businesses in the information age. However, it can create several legal issues for online businesses, particularly when it comes to marketing campaigns.

For instance, sharing trademarked photos or phrases can amount to infringement. There are also things like mandatory disclosures when writing about products or services and rules for online promotions and contests.

Indeed, social media laws and rules are an essential consideration when starting an online business. You’ll want to pay special attention to issues related to confidentiality, branding, employee use of social media, and sponsorship.

Drafting Terms of Use Agreements

Terms of use agreements are equally important as choosing a domain name or the right theme for your business’s website. Popularly known as the “terms and conditions (T&Cs),” these are essentially minor contracts that every shopper agrees to when buying from your online store.

When drafting the T&Cs for your online business, you’ll want to avoid the common pitfall of copy-pasting those of another similar entity. The primary purpose of terms of use agreements is to limit your business’s liability from legal issues that may arise from things like order cancelations and shipping.

Thus, copying the T&Cs statement defeats its purpose because every company operates differently. What works for another entity may not work for yours even if you’re selling identical products.

Well drafted terms of service should:

  • Be easy for your customers to find on your website.
  • Be detailed yet simple enough to understand
  • Based on the technical capabilities of your business to implement them.

Depending on the nature of your online business, some of the essential elements you may want to capture in our terms of service agreement pertain to:

  • Return processing
  • Conditions of use
  • Shipping policy
  • Payment terms and any applicable fees
  • Privacy disclaimers
  • Cancellation policies
  • Product descriptions
  • Intellectual property disclosures

Deciding How to Incorporate Your Business

Early on, you may not have anything against acting as your business’s sole proprietor, especially if it’s small. But while this may be ideal at that stage of your investment journey for various reasons, it makes you legally responsible for all of your company’s dealings. Thus, you may want to incorporate your business as soon as possible.

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You have several options in this regard, from incorporating as a Limited Liability Company (LLC) to Corp, Ltd, and Inc. It’s up to you to choose a method that best suits the nature of your business. The point is that you don’t take too long to do it because incorporating can help you protect personal assets against things like lawsuits from creditors.

Summing Up

That does it for today’s discussion. In summary, we’ve identified the essential legal issues when starting an online business to be design and development, figuring out your taxes, ensuring compliance with data protection regulations, domain name acquisition and protection, and social media laws and rules.

On that list also goes drafting the Terms of Use agreements, deciding how to incorporate, and avoiding trademark, patent, and copyright infringements.

Hopefully, you’ll be able to use what you’ve learned to avoid lawsuits so you can focus on what’s most important: growing your internet-based company. All the best!

If you’re ready to get started. click here for a free ebook to start an online business today.

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