Business basics for a US online store: entity, EIN and sales tax

Before your first sale, the legal checklist for a US online store is straightforward. You do not need an expensive legal entity to start, and getting your federal tax identifier is free. What you must establish from day one is separating your money and registering for sales tax in your home state.

This guide walks through four baseline decisions: choosing between a sole proprietorship and an LLC, getting a free EIN, knowing when sales tax collection applies, and keeping clean books.

Worked example: sales tax compliance and software costs

To see how sales tax rules and calculation tools affect your monthly margin, consider two hypothetical stores selling goods at $40 per order. Each store operates from a single home state with a 6% state sales tax rate and pays standard card fees of 2.9% + 30¢.

In-state sales require tax collection from order one because physical presence creates immediate nexus. Out-of-state orders do not trigger tax collection until you pass that state’s economic nexus threshold. Each state sets its own: the South Dakota law at the center of the Wayfair case used $100,000 in sales or 200 transactions a year, and Illinois uses $100,000, so check each state’s revenue department. Shopify Tax provides free tax calculations on your first $100,000 in lifetime sales, after which it charges a 0.35% calculation fee on orders destined to states where tax collection is active.

Store A: a craft shop launching direct sales (30 orders a month, $1,200 in sales). 15 orders ($600) ship in-state and 15 orders ($600) ship out of state across multiple states. Card fees are 2.9% of $1,200 ($34.80) plus 30¢ × 30 ($9.00) = $43.80. Home-state tax collected is 6% of $600 ($36.00), remitted directly to the state. The store is well under $100,000 in lifetime sales, so tax calculation software costs $0.

At 30 orders a month, Store A owes tax only to its home state agency. Out-of-state sales generate zero sales tax filing obligations because 15 orders scattered across multiple states stay far below thresholds such as South Dakota’s $100,000 or 200 transactions a year.

Store B: a growing brand passing $100,000 in lifetime sales (250 orders a month, $10,000 in sales). Store B has surpassed $100,000 in lifetime sales. 50 orders ($2,000) are in-state. The other 200 orders ship nationwide, and the store crossed the 200-transaction economic nexus threshold in one neighboring state where it now collects tax on 30 orders ($1,200). The remaining 170 out-of-state orders ($6,800) have not met nexus anywhere else.

On active tax destinations (80 orders totaling $3,200 across home state and the neighboring state), Shopify Tax applies its 0.35% calculation fee: 0.35% of $3,200 = $11.20. Card processing on $10,000 is 2.9% of $10,000 ($290.00) plus 30¢ × 250 ($75.00) = $365.00.

The 0.35% calculation fee costs $11.20 a month on $3,200 in taxable orders. As a rule of thumb: do not pay for dedicated third-party sales tax filing software until you have active tax collection in multiple states; standard platform settings handle single-state home sales for $0.

Run it with your own numbers: total revenue minus product cost, shipping label cost, card processing, and any tax software fees. You can map out per-unit margins with the profit per order calculator and plan overall operating overhead with the monthly cost guide.

Sole proprietorship vs LLC: choosing your legal structure

The first choice is whether to operate as a sole proprietor or file for a Limited Liability Company (LLC).

Sole proprietorship: the $0 startup path

The IRS defines a sole proprietor as someone who owns an unincorporated business by themselves. If you do business under your own legal name, the SBA notes that no formal state registration paperwork is required.

• Formation cost: $0 in state filing fees.
• Taxes: Business revenue and expenses pass through to your individual tax return on Schedule C (Form 1040).
• Self-employment tax: You pay self-employment tax on net business earnings of $400 or more via Schedule SE. The IRS self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare).
• The drawback: You have full personal liability. As the SBA warns, you can be held personally liable for the debts and obligations of the business. If someone sues over a defective product, personal savings, your home, and your vehicle are at risk.

If you operate under a brand name instead of your legal name, states require you to register a trade name or DBA. Registering a DBA does not provide legal protection by itself, but most states require it if you use one.

Limited Liability Company (LLC): shielding personal assets

An LLC creates a legal wall between your personal assets and business activities. The SBA notes that in most situations, LLC owners are not personally liable: personal assets such as your house, vehicle, and bank accounts are protected if the business faces bankruptcy or lawsuits.

• Formation process: You file articles of organization with your state’s filing office and pay the state filing fee.
• Operating agreement: The SBA recommends drafting an operating agreement even when state law does not strictly require one.
• Tax classification: By default, the IRS classifies a domestic single-member LLC as a disregarded entity for federal income tax purposes. Business income is reported on Schedule C, just like a sole proprietorship. If an LLC has two or more members, the IRS classifies it as a partnership unless it files Form 8832 to elect corporate taxation.

Getting an EIN: when and how to apply

An Employer Identification Number (EIN) is a federal nine-digit tax identifier issued by the IRS for businesses.

Who needs an EIN?

According to the IRS, you must obtain an EIN if you have employees, pay employment or excise taxes, operate as a partnership or corporation, or withhold taxes on non-wage income paid to non-resident aliens.

A solo founder operating as a sole proprietorship without employees is not required to hold an EIN and can use a Social Security number. However, the IRS allows sole proprietors without employees to request an EIN voluntarily. Getting one protects your personal SSN from suppliers and merchant processors.

Commercial banks also commonly require an EIN to open a business bank account. The SBA notes that business banking offers limited personal liability protection by keeping business funds separate from personal funds.

How to get an EIN for free

The IRS issues EINs at no charge directly through its website. Never pay a service to file for an EIN.

• Online: Apply at irs.gov. The application issues your number immediately. The IRS limits applications to one EIN per day.
• Fax: Fax Form SS-4 to 855-641-6935 (about 4 business days).
• Mail: Mail Form SS-4 to Cincinnati, OH 45999 (about 4 weeks).

Sales tax registration: physical presence vs economic nexus

Sales tax compliance involves two concepts: physical presence nexus and economic nexus.

Physical presence: your home state requirement

If you store, pack, or ship goods from your home, workshop, or warehouse, you have a physical presence in that state. Under Streamlined Sales Tax guidance: “If you have a physical presence in a state, you are not a Remote Seller and are required to register in that state regardless of the amount of sales.”

Before shipping taxable products to customers in your home state, you must register for a sales tax permit with your state revenue department. For example, California requires a seller’s permit via CDTFA for tangible goods, and the Texas Comptroller provides an online tax registration application.

Economic nexus: out-of-state sales rules

Until 2018, out-of-state retailers without physical facilities were not required to collect sales tax. On June 21, 2018, the US Supreme Court decided South Dakota v. Wayfair, Inc., overruling the physical-presence rule.

Today, states enforce economic nexus: an out-of-state business must collect sales tax once sales into that state cross a statutory threshold. Each state sets its own threshold; the South Dakota law upheld in the Wayfair case used $100,000 in sales or 200 transactions a year; check each state on its revenue department site. Deadlines vary: Texas requires registration by the first day of the fourth month after reaching the threshold; Rhode Island allows until January 1 of the following year.

Marketplace facilitator laws

If you sell through Amazon, Etsy, or eBay, marketplace facilitator laws simplify your duties. In California, CDTFA specifies that a marketplace facilitator is generally responsible for collecting, reporting, and paying sales tax on sales made through its platform.

If all of your retail sales go through a marketplace facilitator, you generally do not need a California seller’s permit. But once you launch an independent online store to sell directly to consumers, you are responsible for tax on those direct sales. For more details, see sales tax software for online stores.

Baseline policies every store needs before launch

Published store policies protect your business and set customer expectations before launch. When configuring platforms like Shopify, initial setup requires setting up taxes, payments, shipping, and store policies.

For comprehensive clauses, consult our guide to legal pages and policies for an online store. Three policies are essential:

1. Refund and return policy

Under the FTC Mail, Internet, or Telephone Order Merchandise Rule, merchants must have a reasonable basis to ship orders within stated timelines, or within 30 days if no timeline is stated. If an order cannot ship on time, you must send a delay notice offering a revised date or a prompt refund. When a refund is due, the FTC requires payment within 7 working days (or within one billing cycle for credit cards).

To prevent disputes, clearly state your refund rules on your site:

<!-- Example store return policy clause (illustrative example, not legal text) -->
Returns are accepted within 30 days of delivery. Items must be unused, 
in original packaging, with all tags attached. The customer pays return 
postage unless the item arrived damaged or defective. Once received and 
inspected, approved refunds are issued to the original payment method 
within 7 business days.

Clear terms also reduce disputes. PayPal charges a $20.00 chargeback fee per occurrence, and dispute spikes threaten merchant accounts. For handling payment logistics, review online payments, fees and chargebacks and returns and refunds process.

2. Privacy policy

If your website collects personal data like shipping addresses and email addresses, laws like CalOPPA require commercial websites to conspicuously post a privacy policy. The FTC enforces privacy commitments, warning businesses to honor promises made in published policies.

3. Terms of service

Terms of service govern customer use of your store, disclaim warranties, and define dispute procedures.

When to pick something else

• Co-founded stores with partners: Do not operate as an informal partnership. Under IRS rules, multi-member businesses default to partnership tax status and require an EIN and formal agreement.
• High-risk physical products: If you sell ingestible goods, skincare, supplements, or children’s items, skip the sole proprietorship. The personal asset protection of an LLC is essential.
• Dropshipping models: If suppliers store inventory across regional warehouses, third-party stock can trigger physical nexus earlier than expected. Review dropshipping explained.
• International sellers selling into the US: If you sell from outside the United States, research local thresholds. For example, Canada enforces a small supplier GST/HST threshold of CAD $30,000 across four consecutive quarters, while Australia requires GST registration at AUD $75,000 turnover within 21 days.

Common mistakes when launching

1. Paying for an EIN: Unofficial websites charge extra fees to file Form SS-4. The IRS provides EINs free online in minutes.
2. Mixing personal and business funds: Depositing store sales into a personal checking account muddles tax records. Open a dedicated business account before your first transaction.
3. Collecting sales tax where you lack nexus: You cannot legally collect sales tax from out-of-state buyers unless registered with that state’s tax department.
4. Ignoring home-state tax registration: Many founders mistakenly believe the $100,000 economic threshold applies to their home state. Physical presence requires immediate registration regardless of sales volume.
5. Neglecting recordkeeping: The IRS permits any recordkeeping system suited to your business that clearly tracks income and expenses, but employment tax records must be kept for at least four years. Review the best bookkeeping software for online store.

What to do this week: a pre-launch legal checklist

1. Decide your structure: Choose a sole proprietorship if testing an idea on a $0 budget, or file an LLC if selling higher-liability products.
2. Get your free EIN: Go to irs.gov and complete the free online application to receive your federal ID in minutes.
3. Open a business bank account: Bring your EIN, personal ID, and entity paperwork to a bank to set up dedicated business checking.
4. Register for your home-state sales tax permit: Apply online through your state’s tax department before launching.
5. Configure platform taxes: Enter your home-state tax registration number in your store admin. Out-of-state tax collection remains off until you approach economic nexus thresholds.
6. Publish mandatory policy pages: Add clear return, privacy, and shipping policies to your store navigation before accepting payments. See our launch checklist and how to open an online store.

Sources (checked 2026-10-03)

• IRS: employer ID numbers, EIN eligibility and free online application
• IRS: sole proprietorships, definition and tax reporting on Schedules C and SE
• IRS: self-employment tax, 15.3% rate and $400 filing threshold
• IRS: limited liability company, disregarded entity classification and state rules
• IRS: recordkeeping, business expense records and 4-year employment tax rule
• SBA: choose a business structure, liability comparisons and formation requirements
• SBA: register your business, business names, DBA rules, and state filings
• SBA: open a business bank account, liability protection through fund separation
• SBA: pay taxes, local and state tax obligations
• California CDTFA: registration, seller’s permit rules for tangible personal property
• California CDTFA: marketplace facilitators, marketplace collection responsibilities and $500,000 threshold
• Texas Comptroller: permits, sales and use tax permit application
• Streamlined Sales Tax: remote seller guidance, physical presence rules and remote seller thresholds
• US Supreme Court: South Dakota v. Wayfair, 2018 opinion overruling physical presence
• Stripe: US sales tax and economic nexus, economic nexus definition and state thresholds
• Shopify: US tax guide, consulting tax professionals
• Shopify Tax, calculation fee and $100,000 free threshold
• FTC: Mail, Internet, or Telephone Order Merchandise Rule, 30-day shipment standard and refund timelines
• FTC: consumer privacy, honoring privacy policy commitments
• California Department of Justice: CalOPPA, commercial website privacy policy requirements
• PayPal: business fees, dispute fees and card processing rates
• Canada Revenue Agency: GST/HST registration, small supplier threshold
• Australian Government: register for GST, GST turnover threshold

General information, not legal or tax advice.