Most guides to starting an online business in the US jump straight to marketing — find a niche, build a store, run ads. That's backwards. The decisions that are hardest to undo cheaply (how you're structured, which state you register in, how you collect sales tax) all happen before you make your first sale, and getting them wrong doesn't just cost money later, it can mean refiling paperwork, re-registering with payment processors, or owing back taxes you didn't know you'd accrued. This guide covers that groundwork — not legal or tax advice, but the shape of the decisions so you know what questions to bring to a formation service, accountant, or attorney.
Choosing a business structure
This is the first real decision, and it affects your taxes, your liability, and how seriously payment processors and B2B customers take you.
Sole proprietorship: the default, and why most people outgrow it fast
If you do nothing, you're a sole proprietor by default — no registration required, simplest possible taxes (business income passes straight to your personal return). The catch is liability: there's no legal separation between you and the business, so a lawsuit or an unpaid debt against the business can reach your personal assets. For a side project selling digital downloads at low volume, that risk may be acceptable short-term. For anything handling customer data, physical products, or growing revenue, it isn't.
The LLC: the default choice for most online businesses
A Limited Liability Company is the structure most solo founders and small teams land on, and for good reason: it separates your personal assets from business liabilities, and by default it's taxed as a "pass-through" entity — profits flow to your personal tax return, avoiding the double taxation a traditional C-corporation faces. It also signals legitimacy to payment processors, wholesale suppliers, and B2B clients who are wary of paying an individual.
When an S-corp election starts to make sense
An LLC can elect to be taxed as an S-corporation once profits reach a meaningful level — commonly discussed around $40,000–$60,000 in consistent annual profit, though the right threshold depends on your specific numbers. The appeal is payroll tax savings: you pay yourself a "reasonable salary" subject to payroll tax, and the remaining profit is distributed without that additional tax. The tradeoff is real complexity — payroll processing, more involved bookkeeping, and an accountant to make sure the "reasonable salary" figure holds up. Don't elect S-corp status before a profitable LLC makes the added overhead worth it; many new businesses add this complexity too early.
Registering your LLC: which state, and how
A common early mistake is registering in Delaware or Wyoming because it's "what startups do," without needing to. Unless you're raising venture capital or specifically need Delaware's corporate law framework, register in the state where you actually live and do business. Registering elsewhere while operating from your home state usually means paying for a registered agent and filing as a "foreign LLC" in your home state anyway — double the paperwork and double the fees, for no benefit to a bootstrapped online store or service business.
- Choose your state — almost always your home state, unless an attorney advises otherwise for your specific situation.
- Pick a business name and confirm it's available through your state's Secretary of State business name search.
- Appoint a registered agent — a person or service authorized to receive legal documents on the LLC's behalf; many states require one with a physical address in-state.
- File Articles of Organization with your state's Secretary of State, paying the state filing fee (commonly $50–$300 depending on the state).
- Write an operating agreement — not always legally required, but it defines ownership splits, decision-making, and what happens if a co-founder leaves. Skip this and a future disagreement has no written reference point.
- Apply for an EIN (covered below) once the LLC is approved.
Getting an EIN
An Employer Identification Number is your business's equivalent of a Social Security Number — needed to open a business bank account, file business taxes, and in most cases to sign up with payment processors under the business's name rather than your own. Apply directly through the IRS website; it's free and typically issued immediately online. Be wary of third-party sites that charge a fee for this — the IRS doesn't charge for an EIN.
Opening a business bank account
Keep business and personal finances separate from day one — not just for bookkeeping sanity, but because mixing funds ("commingling") is one of the fastest ways to undermine the liability protection an LLC is supposed to provide. If a court finds you treated the LLC's money as your own personal account, it can disregard the LLC structure entirely in a dispute. Open a dedicated business checking account using your LLC's formation documents and EIN before you take your first payment.
Sales tax and nexus: the part most new sellers get wrong
If you sell physical products, you likely need to collect sales tax in states where you have "nexus" — a legal connection significant enough to trigger a tax obligation. Nexus comes in two forms:
- Physical nexus — an office, warehouse, employee, or inventory stored in a state (including inventory held in a fulfillment center, which matters if you use FBA-style fulfillment that distributes stock across multiple states without your direct control).
- Economic nexus — most states now require tax collection once your sales into that state cross a revenue or transaction-count threshold, even with zero physical presence. Thresholds vary by state (commonly around $100,000 in sales or 200 transactions, but check each state's current rule).
In practice, most online sellers register for sales tax in their home state first, then add other states as their sales volume there crosses economic nexus thresholds. A sales tax automation tool (several integrate directly with Shopify, WooCommerce, and similar platforms) is worth the cost once you're selling in more than a couple of states — manually tracking thresholds across all 50 states is not a sustainable long-term plan. Services sold purely digitally (software, consulting, many digital products) often have different and more favorable rules, but these vary significantly by state and product type, so verify your specific case rather than assuming you're exempt.
Choosing a payment processor
The right processor depends on what you're selling and where your customers are, more than on any single "best" option.
| Processor | Best fit | Typical fee |
|---|---|---|
| Stripe | Custom sites, SaaS, subscriptions, developer-built checkouts | ~2.9% + $0.30 per transaction |
| PayPal | Customer trust/recognition, cross-border sales, simple checkout | ~2.9%–3.5% + fixed fee, varies by transaction type |
| Shopify Payments | Shopify-built stores wanting one integrated system | Varies by Shopify plan tier |
| Square | Businesses with both in-person and online sales | ~2.6%–2.9% + fixed fee |
Two practical notes beyond the fee comparison: first, a new business with no sales history sometimes faces an account review or temporary hold from a processor while it verifies the business is legitimate — this is normal, not a sign something's wrong, and having your LLC paperwork and EIN ready speeds it up. Second, don't pick a processor purely on the lowest headline rate; factor in chargeback handling, payout speed, and whether it integrates cleanly with the platform you're actually building on.
Realistic startup costs
Online business "costs nothing to start" is marketing, not reality. Here's a more honest range for a basic services or e-commerce setup in the first year:
| Item | Typical range |
|---|---|
| LLC state filing fee | $50–$300 (one-time, plus annual report fees in most states) |
| Registered agent service | $0 (if you act as your own) to $125/year |
| Domain name | $10–$20/year |
| Website platform (Shopify, WooCommerce hosting, etc.) | $30–$80/month |
| Business bank account | Usually free with major banks; some charge monthly fees below a balance threshold |
| Bookkeeping software | $15–$40/month |
| Basic business insurance | $300–$1,200/year, depending on coverage and business type |
None of this includes marketing spend, inventory, or your own time — but it's a realistic floor for the legal and operational basics, and it's worth budgeting for before launch rather than discovering it piecemeal.
Insurance and liability
An LLC limits personal liability, but it doesn't make the business immune to lawsuits or claims — it only protects your personal assets from most business-related ones. General liability insurance is worth carrying even for a small online business, and if you sell physical products, product liability coverage matters more than most new sellers assume: a single defective-product claim can cost far more than years of premiums. If you work with clients on deliverables (consulting, design, development), professional liability (errors and omissions) coverage protects against claims that your work caused a client financial harm.
Marketing considerations specific to the US market
Once the legal foundation is in place, the US market has its own competitive realities worth planning around: customer acquisition costs on paid channels are generally higher than in many other markets (see our Google Ads guide for US small businesses and digital marketing benchmarks for US small businesses for realistic numbers), which makes organic channels — SEO, content, and email — disproportionately valuable for a bootstrapped new business that can't outspend established competitors on ads from day one.
Common mistakes to avoid
- Registering in Delaware or Wyoming "because startups do it" without a specific reason tied to your actual business.
- Commingling personal and business funds, which can undermine the liability protection an LLC is meant to provide.
- Ignoring economic nexus and assuming sales tax is only a concern in your home state once sales volume grows.
- Electing S-corp status too early, before the payroll tax savings outweigh the added accounting complexity.
- Skipping an operating agreement with a co-founder, leaving no written reference for how decisions or an exit would work.
- Treating "no cost to start" marketing as literal and launching without budgeting for filing fees, software, and basic insurance.
Conclusion
None of this is the exciting part of starting an online business, which is exactly why it gets skipped — and why it causes problems months later when a payment processor freezes an account pending verification, or a state sends a notice about unpaid sales tax. Get the structure right, separate your finances from day one, understand where you owe sales tax before you owe it retroactively, and choose a payment processor that fits how you actually sell. The marketing can wait a few weeks. The paperwork can't wait at all once money starts moving.