Top 7 E-Commerce Start-Up Legal And Accounting Issues

Here are some legal and accounting issues an E-commerce entrepreneur needs to consider before the site goes live (but preferably while he/she prepares the business plan). Note: each one of these items could have its own Top 7 list.

1. Type of entity. In what legal form are you going to operate? Sole proprietorship, general partnership, corporation, S-corporation, limited liability company. Each one has advantages and disadvantages depending on your individual circumstances.
   
   
2. Ownership of and permission to use Web Site Content. Who created your site for you? If the developer was NOT your employee and did not transfer what she/he created for you, then your developer (not you) owns the intellectual property rights to your Web Site content. Also, how do you know if your developer didn't "borrow" HTML or JavaScript from someone else. Though seemingly harmless, that's a no-no. Same goes for using unlicensed software.
   
   
3. Business Method Patent. If your site does something unique, consider getting a business method patent. Some examples of recent business method patents are: Open Market, Inc.'s Patent Number 5,715,314 - Electronic shopping cart to process network-based sales, Cybergold's Patent Number 5,794,210 - Compensating users to view advertisement or other "negatively priced" information distributed over a computer network, and Priceline.com's Patent Number 5,794,207 - Buyer-driven electronic commerce through a reverse auction over a computer network.
   
   
4. Credit Card Acceptance - Finding a merchant bank can be difficult. The comparative cost analysis is even more difficult. Be weary of hidden fees. For instance, some merchant banks have a low per transaction charge, but they make up the difference by requiring merchants (in some states) to bank at thier bank (where they charge you lots of bank service charges). Also remember, you can't charge someone's credit card for a purchase until the item is shipped.
   
   
5. Backend Systems. You've just created the killer site of the week. Orders are pouring in. Can you ship on time? How are you going to handle returns? Do you have the capacity (inventory and human capital) to handle the orders? All of this requires a well-planned, scalable accounting/inventory/processing system.
   
   
6. Security and Privacy. Have you (or your host provider) set up proper firewalls to protect customer data from hackers? (You are maintaining a customer database, aren't you?) Have you signed up with a third party Certificate Authority such as Cybercash? Are you using SSL encryption? Want to sell in Europe? The European security standard is SET, they don't accept SSL.
   
   
7. Taxes. You've made a lot of money and now the taxman cometh. Where do you have nexus? Your nexus determines where you will pay state income and sales taxes. The federal taxes are also due. Note: The Internet Tax Freedom Act did NOT eliminate taxation of Internet commerce. It just says that Internet commerce can not be treated any different than other businesses. Currently Internet sales are taxed like mail order sales.
   
   BONUS TIP
   
   Going Public. Why not do your own IPO? Although it might be easy to post your financial needs on your web site, DON'T. That will get you in hot water with the Securities and Exchange Commission (as well as numerous state agencies).

Submitted by Jeff Johnston, E-Commerce Architect, Attorney at Law, Certified Public Accountant and owner of Entrepreneur Services, Inc. He specializes in E-Commerce business development. You can reach Jeff at 972-661-9840 or via his web site at www.E-preneur.com.