Do I need a business licence to sell on Shopify? This is a question that many online retailers have. It depends on a number of circumstances, including the products you sell and where you live. We’ll go through that in more detail later.
Although selling via Shopify is simple, you will need various permits and licences. These are those that enable you to collect state taxes.
This article will go over the various sorts of products, business licences, sales tax permits, and how to calculate Shopify’s tax Nexus.
We’ll also go through important tax paperwork, such as the 1099 form Shopify delivers to qualifying merchants.
This will make things straightforward and clear for you, and you’ll be able to rest assured that you have the correct documents.
What is a Business License?
Business licences, also known as business operation licences, allow enterprises to conduct business within government agencies’ jurisdiction.
It permits you to do business in that city, county, or state with your Shopify or e-commerce store. Some online firms may need a licence to operate legally under specific circumstances.
A business licence is frequently required if you are selling regulated products (such as pharmaceuticals or firearms) or performing regulated services (such as real estate or construction).
Most Shopify merchants that run home companies don’t need it. It’s still a good idea, especially if you expect to make a lot of money and will have to pay a lot of taxes to the federal and state governments.
To collect sales tax for the state, you’ll additionally need a form of company licence.
It’s typical to have to renew your business licence every year. Licenses for e-commerce are similar to licences for brick-and-mortar stores.
The rules and processes for obtaining a business licence differ from one location to the next. For more information, contact City Hall or go to the Secretary of State’s website in your state. These licences are simple to obtain, albeit there may be a charge involved.
Check to see whether your business licence needs to be renewed. Fines or fees may be imposed if a licence is not renewed.
Do you need a business license for your Shopify store?
In most circumstances, Shopify stores do not require a business licence.
- Selling things that are restricted by the federal government, such as alcohol, animal products, and guns.
- Payment Gateway for Shopify
- You’ll need to keep inventory in your home and you’ll need health permissions.
If your Shopify store sells everyday grocery and household items, you don’t require a business licence. It’s still worth checking with your state licencing office or the Small Business Administration to see if any licences are still available.
If you have a Shopify store that sells non-regulated goods, you are responsible for collecting sales taxes on behalf of the state. Shopify sellers may be perplexed as a result of the latest legal change. We’ll assist you in ensuring the seamless operation of your store.
Permits are required in most states, according to Nicole Couloute (accountant and owner of the Nicole Grace Collection) on Shopify. It’s known by several names in various states […]. It’s also known as a sales tax resale certificate, seller’s permit, or reseller certificate in some states. If you order from a big dropshipping or wholesale source, you will be charged sales tax.
A seller’s permit or reseller certificate is required to collect sales tax and report the amounts to the state (monthly or quarterly). While some states combine the forms, others require them to be completed separately.
Many states employ both types interchangeably, or none at all if they don’t have a sales tax. You’ll need to calculate your tax Nexus in order to follow your state’s norms and regulations. In the next section, we’ll go over everything.
What is a Tax Nexus?
George Guillelmina is the CEO of Best of Budgets and a licenced investment advisor. A tax relationship, he explained, results in a tax obligation.
This means that you must collect sales taxes in the state where you have a “nexus.” Nexus can form in a state as a result of certain business operations.
There are a variety of methods for determining nexus within a state. Economic linkage is frequently the simplest route. This relates to the number of sales you make in a given state. Each state, however, will have its own set of standards.
Idaho, for example, has set a $100,000 annual minimum criterion for economic linkage inside the state.
Thanks to a number of free resources, Shopify merchants may find out where their nexus is located:
- Interactive map showing the states and their respective sales taxes.
- How each state determines the nexus including annual sales thresholds.
- To find out where sales are creating nexus, take this free risk assessment.
It is crucial to find your tax nexus, as you can see. This will determine the type of sales tax permits that you need (if the state charges sales tax), as well as any other licenses that may be required.
You must first establish if there is an economic connection in the state. Then, contact the Secretary of State and Department of Revenue to request the documentation.
Do you need a business license to dropship on Shopify
Dropshipping via Shopify works the same way as having a Shopify shop. The same rules apply to getting a business license for an e-commerce store.
In other words you don’t need one unless your business sells regulated products or stores inventory at home. It’s a good idea, however, to check the Small Business Administration (SBA) and your state licensing office. This resource will help you locate the nearest SBA office.
Dropshipping is a great e-commerce model because it is so easy! Let’s suppose you want to dropship groceries to Shopify. Your dropshipping supplier stores all inventory. It is their responsibility to comply with health codes and obtain the appropriate storage permits or business licenses from the city.
You don’t need to worry about extra business licenses for storing food or perishables. This is the responsibility of your dropshipping supplier.
You are still responsible for filing your taxes and paying them. We’ll discuss the tax documentation, including your 1099 form, in the following sections.
Here’s what you need to know about your 1099 Form & Shopify
Shopify stores are just like any other income source: taxes must still be paid! No matter what your profession, the taxman always takes your dollar.
When we refer to a Shopify “business license”, we are always referring to tax documentation you need to keep track to file and pay taxes.
Let’s now take a look at the tax and 1099 forms that apply to your Shopify store.
What is an “Independent Contractor?”
The IRS states that “if you’re an independent contractor then you are self employed.” You don’t work at Shopify as an online retailer. Shopify hosts your store but you are still 100% self-employed.
This is especially important when it comes to your tax obligations. You will need to keep track of any income tax you are responsible for. You must file and pay the tax. Shopify handles these tax logistics differently to an employer.
If you are an independent contractor, you must report your store income on Form 1099. This is different from if you were an employee at a traditional employer. In that case, your income would be reported on a W-2 form. Your employer will automatically withhold payroll taxes from you paychecks.
This applies to income tax. Sales tax is a little different. We have already mentioned that you, the store owner, are ultimately responsible for collecting sales taxes and determining what the sales tax rates or laws are for your economic nexus.
Shopify makes it simple to collect it using their Sales Tax tool. However, it is important to know what you need in order to comply with tax laws and best practices for retail.
Does Shopify Send A 1099-MISC Or A 1099-K Form?
We now come to the next point: Shopify and your 1099 Form. This form is crucial for tax documentation. In fact, it’s one of the most important documents you need to fulfill your tax obligations.
First, let’s distinguish 1099–MISC from 1099–K forms.
- 1099-MISC. This is for Miscellaneous Income, if you make more than $600 from freelance work or contract labor in the tax year.
- 1099K.This is Payment Card and Third-Party Network Transactions if you accept bank cards for payment.
Which one is Shopify ending? Shopify will send you the 1099-K form because you’ll be handling credit card transactions via your payment gateway.
How to Find Your 1099 Form on Shopify
Shopify must submit a 1099K form to IRS for all merchants that are eligible under federal law. You must meet the following requirements to be eligible for the 1099K:
- For that year, make $20,000 in sales.
- You must have 200 transactions or more in the year.
Some states, such as Massachusetts and Vermont allow you to qualify for the program with less than 200 transactions. Shopify must also send the 1099 form to each merchant. In other words, if your stores have made more than $20,000 or 200 transactions, you will need to file a 1099K for each shop.
If you are eligible for this 1099, you will see it in Shopify Admin under your Documentsfolder. It will be visible by January after the previous tax year.
These documents are extremely sensitive and only account owners will have access to them. You won’t be able to find it in your admin.
Shopify may send you the 1099K form via email to the email address you have provided under your account owner.
Does Shopify Collect Sales Tax?
Shopify will automatically collect sales tax if you indicate which states you are in. This applies even if your sales nexus is in more than one state. You can start the collection of sales tax by simply going to your Shopify admin.
Consider the following:
- Sales nexus means that you must collect sales taxes from all buyers, regardless of where they are shipped from.
- You don’t need to collect if you don’t have sales Nexus.
Once you’ve established if there is a sales nexus between you and the state, you need to apply for the sales permit (also known as seller permit or reseller certificate). This is important because it is illegal in most states to collect sales taxes without a permit.
Once you have obtained the necessary permits, you can set up Shopify channels to collect the appropriate amount of sales tax. You will also need to file sales tax periodically for every state in which you have a nexus.
Here are some helpful tips for collecting sales tax from your Shopify store:
- You should separate the sales tax and the item price to inflate your product’s prices.
- To find out if your state has a tax on shipping rates, click here
- You can set your tax overrides. Some categories (food, clothing), may be exempt from tax.
There are several apps that can help you collect sales tax from your Shopify store if your store is a success and has nexus in many states. The TaxJar sales tax automation app is particularly useful. It offers a free 30-day trial and paid plans starting at $19/month. This depends on how many orders you process.
What are the Different Types Of Business Licenses For Online Stores?
Shopify stores do not require a business licence, as we’ve seen. Let’s have a look at the many types.
Depending on where you live and what you do for a living, you may need a combination of federal, state, and county permissions and licences. Registrations for small business taxes are among them.
When conducting an online business, these are the most critical licences to have.
Permit
Also known as a tax exemption or a tax exemption. Businesses that sell tax-exempt goods and services must have this type of licence. Your e-commerce business will be able to collect and remit state sales taxes with this permit.
Alaska, Delaware, Montana, New Hampshire, and Oregon are the only states without a sales tax. As a result, a seller’s permission isn’t required. Except for Missouri and Florida, every state with a sales tax requires online vendors to get a permit.
Only stores with at least 100k sales or 200 transactions in the state are eligible for this requirement. Kansas requires remote dealers to obtain a permission from the first sale, and Oklahoma offers a $10,000 exception.
These rules are precisely why determining your economic link is so crucial. You can apply for permissions and/or business licences after you know which state you live in.
Reseller’s License (also known as a Resale Certificate).
This is when things become perplexing. A seller’s permit is tied to a resale certification. Some states favour one word over the other, while others merge the two papers into one.
This is why it’s crucial to figure out where your economic nexus is. The Department of Revenue’s website has resale certificates for certain states.
If you want to resell items or materials to consumers, you may need this permit. When buying bulk items for resale, you must submit the permit to the supplier to be able to sell your product tax-free. Because the vendor is required to disclose sales to federal or state tax authorities, this is the case.
Because the sales tax is still collected from the end buyer, e-commerce enterprises can avoid paying twice the taxes on their items by obtaining a reseller’s permission.
In other words, resale certificates identify a company’s permission to make certain non-tax-deductible purchases.
License for General Business
For your e-commerce business, your state may need you to obtain a general business licence. You may also require a county or local business licence.
For example, some towns require home-based enterprises to get a certificate of occupancy/home occupation permit. This changes depending on the jurisdiction.
General Business License
Your state may require you to obtain a general business licence for your e-commerce company. You may also need a business licence at the county or municipal level.
Some cities, for example, require that businesses that are located at home obtain a certificate of occupancy/home occupation permit. This varies from one jurisdiction to the next.
Employer Identification number (EIN),
Every business needs a federal Employer ID Number (EIN). This number is required for tax purposes. It’s simple to register on the Internal Revenue Service website.
Employers must register with the employer withholding tax authorities in their separate jurisdictions if they employ workers. You may also need to register with the state unemployment office and/or apply for worker’s compensation.
According to the IRS, you can apply for an EIN if you:
- Your primary place of business is in the United States or one of its territories.
- You are the owner of a Social Security Number (SSN).
It’s vital to understand that each responsible person can only have one EIN. In this case, “responsible” refers to the person who owns, controls, or exerts ultimate authority over the corporate organisation.
Your Social Security Number might be used to identify you as a tax payer if you are a solo proprietor with no workers. For the purposes of employment taxes, contract employees (freelancers) are not considered taxable employees.
Do you need a business license if your home is turned into a business?
You may need additional permits if your Shopify or e-commerce store is located in your home.
- You will receive a lot of customers and employees who come to your house.
- Make changes to make it a commercial space by hanging a sign
- Your inventory is large (your garage/house doubles as your warehouse).
- Many shipping carriers will pick up packages frequently
- Noise and odor are major nuisances
These rules don’t apply e-commerce store owners. Customers won’t come to your home if you sell online via platforms such as Shopify or Amazon.
You will likely need to have multiple carrier pickups since your home doubles as your fulfillment center. If you store a lot of inventory, you might also require a permit.
This does not apply to dropshipping, however. Dropshipping is where your supplier takes care of the logistics of shipping, packaging, and storing the products to the customer. You can focus on your marketing while they manage the fulfillment center.
How to Get a Resale Certificate or Seller’s Permit
A seller’s permit can be obtained by mail usually for very little or no fee. Send the following information to your state revenue department:
- Federal Tax ID numbers
- Address of your office/HQ
- State of residence
- Revenues
To get your reseller’s licence, go to your state’s Department of Revenue and fill out an application (resale certification).
Some states do not provide separate permits for resellers. They rely on your sales tax identification number instead.
Check the Department of Revenue’s website or give them a call in the state where you have an economic tie. It’s critical to confirm your company’s address and headquarters, as well as determine which states you have a commercial relationship with. Make advantage of the resources listed in the preceding section.
Why is it even necessary to obtain a company licence?
We’ve established that Shopify does not necessitate the acquisition of a licence (except if you are selling regulated products or store inventory at your home). This is fantastic news! It’s still a good idea to have one, especially if your company is profitable. Let’s have a look at the three most important factors.
Taxes
This is a massive undertaking. Always remember to pay your taxes! This is a critical point that cannot be overstated. If you do to comply, you may face serious penalties or even criminal accusations. Remember to collect sales tax in states where you have a business relationship. The Shopify merchant is now responsible for this.
Tax write-offs, on the other hand, can save you a lot of money. You must register your business in order to take advantage of the tax legislation designed exclusively for businesses.
If you execute at least $20,000 in transactions or more than 200 transactions in a calendar year, Shopify will issue you a 1099K tax form. Learn all you need to know about Shopify and the 1099 form.
Once you’ve been accepted for the 1099, click the Documentslink in the top left corner of your Shopify payments payout page to see it.
Liability
There are a variety of business licences that might assist you restrict your liability. To secure your assets and restrict your liabilities, Nicole Couloute (a Shopify store owner and accountant) recommends forming an LLC. If you make a lot of money from your firm, an LLC that is taxed like a S Corp can be a suitable alternative.
It is easy to register an LLC or S corp. These business structures have tax benefits, so you will need to go through The Internal Revenue Service (IRS). You will need to file Form 2553 with the IRS in order to create an S Corp.
Legitimacy
You must show your suppliers that you trust them if you want to establish meaningful relationships. If you don’t appear legitimate, no reputable brand will work with you.
Suppliers will be impressed by your ability to register as an LLC/S Corp.
You will also need a Federal Employer ID Number (EIN), a resale certificate, or seller’s permit from most legitimate suppliers (depending on the name in your state).
You can see that even though you don’t require a business license it is a good idea to have one. This is especially true for those who expect to make a substantial profit from your online store, or even if it becomes your main source of income.
Registering Your Online Business
Let’s suppose you have decided to register your online company in order to be ready for when it takes off. These are the steps to follow to register your online company once it is making a profit :
Select a Business Structure
There are many options. There are many options for online businesses. There are differences in how taxes are calculated and paid. These structures also have concerns about profit-sharing and liability with business associates.
Register a “Doing Business as” (DBA). Name
Any business name that is not the owner’s given name must be registered with the local authorities. Name selection is part of both LLCs and corporations.
To register a name, sole proprietorships or partnerships must file a form with the local government. Otherwise, the name defaults to the owner.
The Doing business as, or DBA name, is the assumed business name. This legal name is required for tax paperwork, permits, and other government forms.
Get A Federal Tax ID
Also known as an EIN. A federal tax ID number is required for sole proprietorships that have no employees. However, corporations, partnerships and LLCs require one. A federal tax ID number is used to identify a business. It can be useful in keeping your personal and business finances and taxes separate.
Get A Sales Tax ID
The vast majority of ecommerce businesses have to comply with tax requirements at both the local and state levels. All new ventures must register with the state’s revenue office. In some states, they may also need to apply for a permit in order to collect sales tax.
You can see that taxes are an inevitable part in making money in any business venture. Remember that e-commerce is just like a brick-and mortar retail business. Uncle Sam will want his cut if you make money. Your tax obligations will vary depending on which type of business structure is chosen.
State-by-State License Rules and Regulations
Although it may seem obvious, the rules and regulations for business licenses will differ from one state to another. It is important to consult your local licensing and legislation office.
California, for example, requires a seller’s license to collect sales tax. You will also need to register or form an entity with the California Secretaryof State.
City codes may also apply in some cases. A business licence may be required to run a commercial property in some cities, such as Los Angeles. Owners of Shopify stores tend to avoid this because it is one of the key advantages of owning a Shopify site. These costs are avoidable!
Reseller’s licences and certificates are not issued in every state. Your home-state reseller’s permit may be accepted by out-of-state vendors. Alternatively, you may be required to complete another form using your taxpayer identification number (TIN). Out-of-state reseller certificates are not accepted in Alabama, California, or Florida.
General business licences are available in Alaska, Delaware, and Nevada. General licences are available statewide in Washington, Tennessee, Tennessee, and Nevada. For Shopify stores, these licences are unlikely to be required.
To start a business in California, you’ll need to file for a Doing Business As name (DBA) and a resale permit. A local newspaper will be needed to print a 4-week notice regarding your DBA name.
If you relocate to another section of California, your licencing requirements may change. You won’t require a business licence in Los Angeles if you don’t sell banned goods. Only if you don’t sell under your own name are these rules applicable. You won’t need to register a DBA in those circumstances.