B.A.F.F.L.E.D. Business
3 Legal Gems for Online Boutiques
The first step to formalizing your business dealings will be choosing your business organization and tax classification. The different forms of business organization are:
· Sole Proprietorship;
· Partnership;
· Corporation;
· S. Corporation; and
· Limited Liability Company.
In most states, the Secretary of State is responsible for registering and maintaining records for business entities. The first step to formalizing your business arrangements is becoming a recognized entity. I strongly recommend that you seek legal advice from an attorney in your industry and discuss which option is best for your business.
On the other hand, a tax classification is how the company is identified by the IRS and the state for tax purposes. An LLC, for example, is taxed like a sole proprietorship in that it is considered a disregarded entity. Don't confuse the tax classification sole proprietorship, which means a disregarded entity with the business organization. Sole proprietorship is an entity that is operating as an unincorporated business. Depending on how many owners your business has and your long-term financial goals, you may want to explore other tax classifications. Here is an excerpt from the IRS’s website, specifically the “Classification of Taxpayers for US Tax Purposes” page:
“For Federal tax purposes, certain business entities automatically are classified as corporations. Other business entities may choose how they are classified for Federal tax purposes. Except for a business entity automatically classified as a corporation, a business entity with at least two members can choose to be classified as either an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner.
Be safe, not sorry, and contact a tax professional!
2. Don’t Let Data be Your Downfall:
Your privacy policy is equally, if not more, important than how you collect and store personal information about your customers and store visitors. Before your website goes live, you should consider the following:
(2) Determine how you will use the data;
(3) Appoint a data protection officer; and
(4) Provide clients with a means for correcting or removing any private information you have stored.
Currently, there are two prominent privacy statutes you should be aware of the General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act (“CCPA”). The GDPR is the privacy statute of the European Union ("EU"), and it applies to all EU residents even if the party who collects the information is not located within the EU. The US does not have a national privacy statute that mirrors the GDPR. However, California has enacted an extensive privacy statute, the CCPA. Currently, the CCPA only applies to businesses that (1) process the personal information of California residents; and (2) generate annual gross revenues of more than $25 million.
While many online fashion boutiques may not meet this threshold, you should be at least peripherally aware of the CCPA and respectable data policy. Many believe that the CCPA is a sign of things to come and that a wave of data and privacy regulation will soon sweep the nation. Additionally, the fact that the area is so sparsely regulated in the US makes it ripe for litigation and unpredictable outcomes. Accordingly, the best thing online boutiques can do is act proactively by putting a clear, concise, and user-friendly data policy in place early on.
3. It’s Not Your SMoney!
You should open a business bank account as soon as possible. I also highly recommend only accepting payments via your online store or vendor PayPal account and linking those accounts directly to your business bank account. One of the primary reasons many online boutiques don't make it past the startup stage is the mismanagement of company funds. The best way to help prevent yourself from treating your business bank account like your piggy bank is by separating the two. Trust me, I'm a business owner too, and I know how great the temptation can be to swipe your business card for personal expenses.
While the temptation is high, the risk of shedding your corporate shield is even higher. What's your corporate shield? Do you remember in “Step 1 Formalize Your Hustle” I told you that registering your business would help protect your assets? However, if you use your business bank account like it's your personal bank account, one may be able to pierce the corporate shield; by successfully arguing that the business assets and the personal ones are indistinguishable.
If you genuinely want your business to grow, you should be taking your profits and investing most of them in your business. I also recommend some form of essential bookkeeping early on. One tool that I love is Google Sheets; they have a few booking-keeping templates available. It would help if you started tracking your income and expenses as soon as possible. Plus, you get an annual bonus around tax season every year by having your statements organized and ready for your tax preparer.