The E-Commerce LLC’s Guide to Compliance

If you own an e-commerce business, making it an LLC gives you limited liability protection, flexible operations, and tax advantages. However, an e-commerce LLC must adhere to various legal requirements after formation.

E-commerce LLCs are covered by local, state, and federal laws, just like traditional brick-and-mortar businesses. And on top of that, they must comply with changing digital commerce laws and regulations. Failing to do so can create significant consequences for your online store, from penalties to criminal changes.

In this article, we discuss the important compliance requirements for e-commerce businesses.

Key Takeaways

• Since e-commerce LLCs can serve customers in multiple states, you must know where these businesses can get a state tax nexus.
• Online sellers may need federal, state, and local business licenses and permits to operate and sell their products and services.
• Data privacy laws, digital security standards, and website accessibility laws also apply to e-commerce LLCs.
• Other laws and regulations that online sellers must follow include shipping, customs, and intellectual property laws.
• You can keep your e-commerce business compliant by:
  • Meeting state-specific legal requirements
  • Implementing a strong cybersecurity strategy
  • Fulfilling tax obligations

Sales Tax Payments

E-commerce taxes are one of the most complicated aspects of compliance for online sellers. That’s mostly because e-commerce LLCs can operate in multiple states.

All 50 states impose specific sales tax requirements on online businesses. Specifically, sales tax nexus may apply to your e-commerce LLC. It refers to the connection or relationship between a business and a state that creates a state tax obligation.

A Note on Economic Nexus

Sales tax nexus is divided into multiple types, including economic nexus.

Economic nexus applies to businesses that make a specific number of transactions in its chosen jurisdiction, even if they sell products or services out-of-state. Each state sets certain thresholds for sales, transactions, or revenue generated in it. These thresholds determine when a business must collect and remit sales tax.

Economic nexus thresholds vary by state. In some jurisdictions, economic nexus applies to e-commerce businesses with revenue exceeding a specific amount. Other states determine whether to give businesses an economic nexus based on their total revenue or number of sales transactions in their jurisdiction.

Let’s look at some states with economic nexus thresholds for e-commerce LLCs.

To know how sales tax will affect your LLC’s revenue, find out where sales tax nexus applies to the business. Then, register and file the appropriate taxes in your chosen state(s).

Related Resource

Learn how to file business taxes for your E-commerce LLC here.

Business Licenses & Permits

Your E-commerce LLC may also be required to obtain business licenses and permits, depending on its jurisdiction and industry.

Federal Licenses

If your online business sells certain kinds of products, it must secure the necessary licenses. These include:

• FCC IDs for electronic devices that produce radio frequencies
• FDA registration for sellers of the following goods:
  • Animal and veterinary drugs
  • Cosmetics
  • Food
  • Drug products
  • Medical devices
  • Radiation-emitting devices
  • Tobacco products
• ATF licenses – The Bureau of Alcohol, Tobacco, Firearms and Explosives issues these licenses to importers, manufacturers, or sellers of explosive materials.
• General Certificate of Conformity (GCC) – Issued by the Consumer Product Safety Commission, the GCC states that specific products covered by consumer product safety rules or similar regulations adhere to applicable rules.

State & Local Licenses

In addition to federal licenses and permits, you may need to obtain state and local licenses for conducting business. Nevada’s state business license is one example, which LLCs must get to operate in the Silver State.

Your chosen jurisdiction may require you to secure additional licenses for warehouses or similar facilities as well. Check the state’s current requirements for more information.

Digital Privacy & Security Laws

Digital business regulation has increased significantly in recent years. Currently enforced laws address everything from consumer data protection to website accessibility. If you’re an E-commerce LLC, you must adhere to these regulations to avoid fines, lawsuits, or arrests.

Data Privacy Laws

While the U.S. has yet to enact a comprehensive national data privacy law, some states have enforced local privacy-related legislation. So far, the following jurisdictions require compliance with these statutes:

• California
• Colorado
• Connecticut
• Delaware
• Indiana
• Iowa
• Kentucky
• Maryland
• Minnesota
• Montana
• Nebraska
• New Hampshire
• New Jersey
• Oregon
• Rhode Island
• Tennessee
• Texas
• Utah
• Virginia

Furthermore, e-commerce LLCs in the U.S. must comply with other data privacy laws. They include the General Data Protection Regulation (GDPR) for online stores with European customers.

Data Security

Cybersecurity is another important part of an e-commerce business’s operations. If your online store accepts credit or debit card payments, it must maintain PCI DSS (Payment Card Industry Security Standard) compliance. These unified guidelines for e-commerce businesses cover secure payment processing, checkouts, and the correct handling of transaction-related data.

Non-compliance with PCI standards can expose consumer data to potential theft or breaches. If the scenario happens, your e-commerce business may pay fines ranging from $10 to $10,000 per month. Other consequences include digital forensic audits, the limited use of payment processors, and potential lawsuits.

Website Accessibility

The Americans with Disabilities Act (ADA) applies to e-commerce websites. Under this law, online stores must have accessible webpages with elements such as:

• Clear, readable text
• Alt text for images
• Headings and lists for organized content
• Easy navigation
• Clear buttons and clickable links
• Properly labelled forms that are easy to complete and submit
• Captions and transcripts of multimedia content

FTC Requirements

If you plan to collaborate with affiliate marketers or social media influencers, consider checking the Federal Trade Commission’s rules first. The agency requests influencers to inform their followers about collaborations with e-commerce businesses.

Suppose your chosen influencer shows your products on a “get ready with me” video. Under FTC regulations, these personalities must mention that your business has given items to them. This way, you avoid misleading customers when selling your products or services.

The FTC Act considers non-compliance a deceptive trade practice, and the agency can impose considerable fines on your business and its affiliate.

Shipping & Customs Regulations

E-commerce LLCs must follow shipping and customs regulations as well.

For shipping, the U.S. Postal Service (USPS) prohibits online stores from shipping aerosol products, alcoholic beverages, hemp products, and similar products in and out of the country. E-commerce businesses should also set shipping times with a reasonable basis. If your store doesn’t send orders to customers within a certain period, it must inform them of the delay or refund their payments.

Additionally, e-commerce LLCs must adhere to the U.S. Customs and Border Protection department’s basic import requirements. For example, imported shipments must have detailed and accurate product descriptions. A jacket can be described as a “Black Leather Biker Jacket” instead of “Jacket.”

Trademark & Copyright Laws

U.S. law states that intellectual property owners or authorized personalities can use registered trademarks and copyrights. Hence, your e-commerce LLC must get legal consent to use intellectual property in its products or marketing materials. Unauthorized use of trademarked and copyrighted materials can result in legal action.

Related Resource

Find out what happens if your LLC gets sued on NCH’s blog.

How Can E-Commerce LLCs Stay Compliant?

Compliance for e-commerce LLCs involves taking important steps to keep the business in good standing with federal, state, and international authorities.

Meet State-Specific Legal Requirements

E-commerce LLCs must follow their state’s legal requirements, including:

• Filing an annual report with the Secretary of State or equivalent
• Maintaining a registered agent
• Drafting and updating their operating agreement
• Keeping detailed financial records and operational documents for tax and legal purposes

Learn About NCH’s Registered Agent Service

Develop & Implement a Strong Cybersecurity Strategy

Besides PCI DSS compliance, your online business should have a strong cybersecurity strategy. Your plan should cover data backup, recovery, and software licenses, among others. And to keep sensitive customer data protected, consider limiting access to trusted parties. Unauthorized access can cause data breaches that affect your LLC’s relationships with customers and reputation.

Fulfill Tax Obligations

Again, e-commerce taxes are challenging to manage. The following tips can help you pay these taxes on time.

• Use tax software that can be integrated into your e-commerce platform. Choose a system with features such as:
  • Real-time calculations based on shipping addresses
  • Nexus threshold tracking
  • Simplified filing and payment processes
  • Report generation
• Consider product-specific tax rules. Goods such as liquor products or firearms may be taxable in your home state.
• Check international tax regulations. Your online store may be subject to value added tax (VAT) if it sells products or services outside of the U.S.

Frequently Asked Questions

What’s the typical threshold for an economic nexus?

The typical threshold for an economic nexus varies by state. Your jurisdiction may give you one if you generate revenue that exceeds a certain amount or make a specific number of transactions.

Revenue thresholds for economic nexus start at $100,000. Meanwhile, transaction thresholds range from 100 to 200 transactions.

Do I need business licenses for each state where I sell products online?

The answer depends on the requirements set by each jurisdiction and the nature of your business activities.

Some states don’t require e-commerce LLCs to obtain business licenses. However, others may do the opposite, especially if you own warehouses or similar facilities. Your business may need federal licenses and permits as well.

How do I handle sales tax for digital products & services?

Like business licenses, sales tax requirements for digital products and services vary by jurisdiction.

Some states consider digital products as taxable, while others don’t. In Nevada, certain digital products and services are exempt from use and sales tax. Check your chosen jurisdiction’s tax rules on digital products and services before registering your business.

Do online marketplaces handle all my tax & compliance obligations?

For the most part, online marketplaces don’t handle all of your tax and compliance obligations. They may collect and remit sales tax to your state’s tax department, but that doesn’t cover everything. You still have to pay income taxes, maintain your LLC, follow product safety rules, and manage your website’s sales.

Does dropshipping change my LLC’s compliance requirements?

While dropshipping can eliminate your need for inventory or product storage, your LLC must stay compliant with legal requirements. It may be subject to economic nexus, sales tax, and consumer protection regulations.

Moreover, you must manage all drop-shipped products. At the very least, these goods must be labeled properly and shipped on time.

Do I need written terms, policies, & disclosures on my e-commerce site?

Yes, you need written terms, policies, and disclosures on your e-commerce site. Take time to draft and share (at least) your store’s terms of use, privacy policy, and clear shipping, refund, and returns policies.

Also, check whether your products show transparent pricing and disclose any recurring charges. Both build trust with your customers.

What records should my e-commerce LLC keep?

The records that your e-commerce LLC should keep include:

• Sales records
• Documented tax calculations
• Records related to returns and refunds
• Copies of customer correspondence
• Copies of applicable licenses or permits
• Vendor contracts

Tax-related records can be maintained for at least 7 years, while other documents can be kept for longer.

What privacy laws apply to my e-commerce website?

If your home state has privacy laws, those regulations will apply to your e-commerce data.

19 out of the 50 U.S. states currently enforce privacy laws, including Delaware. These jurisdictions have different privacy-related requirements, which you must check before forming an e-commerce LLC.

How often should I review my LLC’s compliance obligations?

Consider reviewing your LLC’s compliance obligations quarterly or regularly. After all, the laws and regulations relevant to your online business can change at any time.

Start by checking state tax nexus thresholds, privacy laws, and industry standards for amendments. You may also want to set automated alerts for regulatory changes and consult compliance experts.

How are e-commerce LLCs penalized for non-compliance?

E-commerce LLCs can be penalized for non-compliance through substantial fines and total damages from lawsuits. These amounts vary by violation and jurisdiction. For example, failing to comply with PCI DSS standards can cost you up to $100,000 per month.

In some cases, your business may be dissolved by state or federal authorities.

Expert Tips From NCH

1. Use automated compliance monitoring systems. These tools can help you track sales tax nexus thresholds across your chosen states and remind you of upcoming compliance deadlines.
2. Track your sales data monthly for little to no nexus obligations. Many businesses discover they’ve exceeded thresholds only during year-end reviews, creating significant issues for their compliance.
3. Consider factors such as taxation, ongoing compliance, and operational requirements when choosing an LLC formation state. Nevada is considered an excellent location for e-commerce businesses mainly because of its business-friendly environment.
4. Take steps to protect customer and business data upon your e-commerce LLC’s launch. Obtain SSL certificates for your website, follow PCI DSS guidelines, and implement a comprehensive privacy policy.
5. Keep detailed records of your LLC’s operational procedures and legal obligations. They’ll strengthen your defense during audits and support your efforts to stay compliant with current regulations.

Bonus Tip

Learn the basics of compliance from NCH’s 60 Second Business Tip series.

Start a Legally Compliant E-Commerce LLC Today

Online sellers are required to follow state, federal, and international laws applicable to them. However, these regulations may change over time, making compliance extremely challenging. That’s why learning about (and understanding) new and amended e-commerce regulations is important. When you spend time on this crucial task and maintain compliance, you avoid costly penalties and legal issues while increasing your credibility.

NCH can help you start an e-commerce LLC and ensure that it adheres to relevant laws and regulations with expert advice.

Open Your E-Commerce LLC Today

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.