E-commerce is rapidly growing in the U.S. and all over the world. In 2020, its global sales increased by 27.6%, more than double the pre-pandemic growth estimate. Experts predict that it will continue to rise over the years, so much so that by 2025, global sales could reach $4.2 trillion.
As such, even traditional entrepreneurs are starting to shift to e-commerce. Not only is it promising, but significantly more cost-efficient than managing a brick-and-mortar, too. E-commerce has no rent, which many companies consider a leading cost driver. In addition, e-commerce businesses can use remote employees. This allows them to reduce operational costs.
But an e-commerce business comes with a different set of challenges. You can’t venture into this industry blindly. Your business management skills alone may not be enough to keep the business running. Also, e-commerce is subject to laws a traditional company may otherwise be not.
Without knowing the legal aspects of the industry, you may be in for a disastrous start. That said, here are the legal factors to consider for an e-commerce business:
1. Legal Structure
Just like any business, an e-commerce company should also have a legal structure. There’s no special or specific structure meant for e-commerce, so you’d choose from the same options, such as:
- Sole proprietorship: only one person is responsible for the company’s profits and debts
- Partnership: two or more individuals own the business, sharing equity
- Limited partnership: a type of partnership where only one partner manages the operations and the other/s contribute to and receives a portion of the profit
- Limited liability company (LLC): owned by shareholders enjoying the same benefits as a partnership; can limit personal liabilities if the business acquires debt
- Corporation: a business entity separate from its owners
- Cooperative: owned by the same people it serves
Your legal structure will determine the laws your business is bound to follow. But there are also common laws businesses of all legal structures must follow.
2. Business Model
In e-commerce, the business model refers to your method of operations. There are three types, namely:
Direct Sales E-commerce Store
This is the simplest arrangement, as your customers can buy products directly from your website and make their payments through the platform it offers. You’ll have your own domain, web design, and policies regarding refunds and exchanges.
Examples of subscription models are news sites that offer unlimited access to paying users. This model often has different offers for different payment amounts. For example, the cheapest subscription only offers up to 100 articles a month, while the most expensive subscription offers an unlimited number of articles and other content.
If you’d choose this model, you should also have a policy for defaulting subscribers. In addition, you’d need a system for managing cancellations and terminations.
Amazon and eBay are examples of a marketplace model. They provide a platform for customers and retailers to interact. In this model, your business doesn’t offer products other than the platform or website itself.
As such, you can decide whether to hold customer payments or release them to the retailers straightaway. Holding a payment may offer greater security, because a customer may get a refund faster if the retailer doesn’t deliver. However, this option can increase your liability risks.
Registering a trademark will protect your brand and intellectual property. It prohibits competitors from copying your name, logo, slogan, and other branding and marketing media. But registering a trademark isn’t as simple as it sounds. You need to follow some guidelines to register successfully.
For example, your logo should not be too generic or too descriptive. It should look unique but memorable enough. You can’t make it similar to your competitor’s logo to confuse or lure the market. For instance, if you’re competing with Amazon, you can’t copy their brand colors, font, and strokes. Your logo should be original.
4. The General Data Protection Regulation Law
The GDPR is the toughest data privacy and security law passed yet. It’s mandated by the EU, but e-commerce businesses and websites outside the EU are also required to comply if they serve users from the EU.
This law requires your e-commerce business to provide terms and conditions to customers creating an account. It also requires the website to ask permission before collecting data or cookies. The permission is the pop-up you see whenever you open an app or website. The response options must include consent, preferences, and a decline button.
To comply with this law faultlessly, provide an excellent GDPR Software as a Service (SaaS) agreement. It’s basically a document showing terms and conditions your customers may agree or disagree with.
With these legal factors considered, you can start your e-commerce business assuring your compliance. Consult a lawyer when you’re in doubt. And before making any major move, ensure that you’ve weighed in the legal risks.