The Legal and Tax side of starting an ecommerce business

Anyone can have a basic website or blog in the U.S. The legal issues come with what you do on that site. If you’re selling products, for example, you’ll need to register as some kind of business entity with your state and collect and pay taxes for sales made in your state.

First off, it’s a good idea to start considering options to officially establish your business as a legal entity right away, as the paperwork and processing may take several weeks. You may want to contact an attorney for this process, or consult online resources such as Legal Zoom.

Most entrepreneurs will get started with a sole proprietorship and set up a DBA (doing business as) name to facilitate charges being applied towards an official-sounding business rather than an individual’s name. The second most popular option is the LLC, which adds a measure of protection for the individual while still keeping the registration process relatively simple and costs low (compared to what would be involved to set up a corporation of any type).

Once you know what kind of entity you want/need, your state should have a website with all the paperwork you’ll need to establish your entity. Do a Google search for your area. Also, be sure to find a phone number for the appropriate office who can answer questions about your application, and go through the whole thing to find all the questions you have so you can ask them all at once.

This is also a good point to consult an accountant to go over any tax advice you may need. There’s a lot you can do on your own online, like setting up a tax id. The easiest and fastest way to get an EIN (tax number) is online at http://irs.gov. Most basically, an EIN identifies tax returns filed with the IRS. The IRS will also provide a lot of information about that and any other tax questions you may have. When you get to the website, search for keyword ‘EIN’ and complete the form. You should get your EIN within minutes, for free. There are several companies who do this for a price, but it’s not necessary!

Browse through the IRS site to find more info that will help you get started. In particular, search for Publication 334, a Tax Guide for Small Business. Among other many other topics, this guide addresses:

• Filing and Paying Business Taxes
• Accounting Periods and Methods
• Business Expenses and Deductions
• Figuring Net Profit or Loss
• Your Rights as a Taxpayer
• How To Get More Information

Once you’re making money, it’s really smart to work with a good accountant. Also, Diane Kennedy’s tax advice books are very helpful and can be found on Amazon or other places online for decent rates. She is a CPA and stays current on specific issues for different types of businesses and real estate deals. Setting up a small business can pay off greatly in your tax benefits alone, regardless of the profit you make in the first two years! Careful planning with a keen knowledge of your possibilities, combined with advice from a lawyer or consultant can maximize these tax advantages.

Turning your idea into a product

So you have your genius idea you’re sure can make it big. But how do you turn this into a physical product without wasting money or having someone else steal your idea? Keeping in mind that less than 1% of products patented ever come to market, a lot of people have invested significant amounts of money with no return on their own ideas. By doing all your research up front, you’ll know your idea is feasible before spending more money than you need to.

1) Draw a detailed picture of your product and write a detailed description.

Make sure to include dimensions and include what it is, what it’s used for, and any other details you can. Use Google Patents for examples of what to include. This will also help you see if there’s already a patent for your idea. Make a copy and mail it to yourself. Then you’ll have a sealed, post-marked envelope to use as evidence that you created the idea by such and such a date. This can be showed to a judge if the need ever arises.

2) Gather Information on manufacturers.

This can be a tedious process as there are a lot of manufacturing companies out there, but it will pay off to find the best fit. As you contact companies individually, you’ll know what to expect as fair prices within the industry. Plus, you’ll get a feel for who has the best service.

Also, always call, don’t email.

The drawing and description will help as you contact potential manufacturers. You should not give away too much info too early, so decide on a related product that may have similar properties you can use as an example. Even if there’s nothing like your idea in function, think of some of the properties it may have and come up with an example to use. As you call manufacturers, indicate that you do not want to go into specifics, but you’d like to produce an item similar to “x”, of “y” dimensions, made out of material “z.” First, find out if the company can make it. Then, get more information on how much it would cost for them to produce a prototype of the item.

Here are some resources to use as starting points:

• Thomasnet.com
  • Choose the section Custom Manufacturing & Fabricating, then the category closest to what you want to produce.
• Then, try some Google searches for the word similar to what you’re making, plus the following:
  • Manufacturer. If they don’t make it, ask for a referral on a company that might.
  • Distributor. Ask for manufacturer references. Tell them you’re making a product with similar materials in a different industry.
  • Association. Every industry has an association that can provide a lot of information. Find out who the association officers are and ask for manufacturer recommendations.
  • Trade magazine. You’ll learn a lot about trends in that industry, as well as some names of people who could help. Contact the editors for recommendations. This will also help you make connections that could help in marketing later on.
  • Article. As a last resort, you’ll find more information on similar products and contacts for companies who make them.

3) Decide on a manufacturer to create a prototype.

Decide which company you feel best about and give them the information to create a prototype. First, however, be sure to have anyone you talk to about your product in detail until it is patented sign a non-disclosure agreement that says something to the affect of “I agree not to divulge your idea to anyone else.” Have it dated and signed. Google pre-written non-disclosure agreements online that you can adjust and use yourself.

Most companies offer reasonable prices to create a prototype, because they want to be selected to manufacture your product. Depending on the prices of materials though, or if they have to create an expensive mold, it may be more. Consult with the company to make any changes you want. It may take several revisions to make it perfect. It’s best to have the actual item or pictures, with exact dimensions before you talk to a lawyer so don’t waste money on too many meetings. Even if you just have a shell available, you can show that and explain the interworkings.

4) Consult with a patent lawyer and online options.

Most patent lawyers will provide a free consultation. Ask if that could be arranged to see what it would take to have your product patented. When you know the price, thank him/her for the time spent, and say you will get back with him/her very soon. Look online to see what other price options are available. By calling around, you’ll get a feel for what’s out there.

5) Have a professional conduct a patent search.

Before you move forward with the lawyer, pay someone with experience to check your product against any similar patented products that may exist. They will run a report letting you know of any remotely similar items with current patents. You can search for an online agency to do this, or ask the local lawyer for recommendations. This will provide information on how to differentiate your item, and possible aspects to cover.

6) Move forward with your patent.

When you receive the patent reports, move forward with your lawyer to patent the product. It usually takes 6-8 months for a patent to be approved. However, there are ways to get it done in matter of weeks. Try googling “fast patent” for more details. Also visit the United States Patent and Trademark Office website for more information.

When the patent is processed, you can move forward to manufacture the item.