Starting a Consignment Store Part 2: Paperwork and Legal Setup

Kent Atkinson

Oct 2, 2025

If you're new to this series, be sure to check out Part 1: Choosing the Right Business Model

The Paperwork and Legal Setup You Need to Open a Consignment Store

This is often the most intimidating step for any small business owner. But you have the entrepreneurial spirit that won't allow paperwork to keep you from achieving your dreams and goals.

This beginner-friendly guide will walk you through the step-by-step legal setup for a U.S.-based consignment shop, from choosing a business structure to drafting a consignor contract. By handling these steps up front, you’ll set your shop up for success and avoid headaches down the road.

Step 1: Choose the Right Business Structure

The first step is deciding on a legal structure for your consignment store. The most common options for small shops are sole proprietorship, partnership, or a limited liability company (LLC). Each has pros and cons:

Sole Proprietorship is the easiest to start. No formal filing is required to form a sole proprietorship, and you can simply operate under your own name or a DBA (“doing business as”). It’s inexpensive and you have complete control. However, your business isn’t a separate legal entity, you are personally liable for all debts and obligations of the store. This means personal assets could be at risk if the business incurs debt or legal claims. Sole proprietorships work best for very low-risk, one-person businesses you’re testing out.
Partnership: If you’re starting the shop with a co-owner, a partnership lets you share ownership and profits. They are relatively easy to set up with a simple partnership agreement. Like a sole prop, standard partnerships do not shield personal liability. Each partner is jointly responsible for business debts. You also need to manage the relationship carefully, since disagreements can be hard to resolve. An LLP (Limited Liability Partnership) can offer some liability protection to partners, but rules for LLPs vary by state.
Limited Liability Company (LLC): An LLC is a popular choice for small retail businesses. It creates a separate legal entity that protects your personal assets from business liabilities in most cases. If someone sues the store or it can’t pay its bills, your house or savings are typically protected. LLCs also enjoy pass-through taxation (profits are reported on your personal tax return, avoiding the “double taxation” of a C-corp). The drawbacks are the state filing fees and slightly more paperwork to maintain. Owners of LLCs are usually considered self-employed, so you’ll still pay self-employment taxes on earningssba.gov. Overall, an LLC is often a good balance of simplicity and liability protection for a consignment shop.

We recommend starting an LLC because it combines liability protetion with tax flexibility and it's not overly complicated.

If you need to do taxes in the future, don't worry, we have you covered with our Ultimate Tax-Filing Guide for Consignment Stores.

Step 2: Register Your Business (and Name)

After choosing a structure, you’ll register your business with the appropriate government agencies. You'll need to:
• File formation documents with your state (for an LLC, this is often called Articles of Organization).
• Pay the filing fee (usually $50–$500 depending on the state).
• Keep the certificate the state sends you — you’ll need it for banking and records.
• If you want to operate under a different name than your legal one, file a DBA (Doing Business As) with your county or state. Rules for business name registration differ by state, so check your state’s business registration website or the SBA guides for details
• Check your city and county rules to see if you also need a general business license.

Tip: While registering, also check what business licenses your city or county requires (more on that below). You can often find guidance on your state’s small business portal or through the U.S. Small Business Administration (SBA).

Step 3: Get an Employer Identification Number (EIN)

Next, obtain an Employer Identification Number from the IRS. An EIN is a federal tax ID for your business, essentially like a Social Security number for your company. You’ll use it when filing taxes, and it’s typically required to open a business bank account, apply for licenses, and hire employees.

Getting an EIN is quick and free. The IRS allows you to apply online, and you’ll receive your EIN immediately upon completion of the application (no need to pay any third-party service)sba.gov. Simply go to the IRS website’s EIN application page and fill in the details (you’ll need to provide your name/SSN and business structure info)

Even if you’re a one-person sole proprietor with no employees, having an EIN is useful – it lets you avoid using your personal SSN on business forms and can be needed for things like resale certificates or setting up payroll later.

Pro Tip: Apply for your EIN after you’ve registered your business with the state, so that your legal business name is established. Once you have the EIN, keep that confirmation letter from the IRS in your records.

Step 4: Obtain Required Licenses and Permits

With your business officially formed and identified, you must secure any licenses or permits to legally operate. Requirements vary widely by city and state, but here are the common ones for a consignment retail store:

General Business License: Many local governments require a basic business license to operate any business in their jurisdiction. This is usually obtained from your city hall or county clerk’s office. It’s a simple registration and annual fee that essentially gives you permission to do business in that city. Check with your city or county clerk’s office for the process and fees.
Seller’s Permit / Sales Tax License: Because you’ll be selling goods and (in most states) charging sales tax, you likely need to register with your state’s Department of Revenue for a sales tax permit (often called a seller’s permit or resale certificate). This permit allows you to collect sales tax from customers and remit it to the state. Typically, you can apply online through your state tax authority. If you’re not sure, the SBA suggests contacting your state tax office to learn your obligations. Note: A few states don’t have sales tax, but most do.
Secondhand Dealer Permit (if applicable): Some localities have special permits or regulations for selling secondhand goods. These laws (often to deter sale of stolen property) might require consignment and thrift stores to obtain a pawn/secondhand dealer license or follow specific record-keeping rules. This isn’t universal, but research your city/state to see if a secondhand merchandise permit is needed.
Zoning and Occupancy Permits: If you have a physical storefront, ensure the location is zoned for retail use. You may need a certificate of occupancy or zoning permit before opening to confirm your shop meets local zoning, building, and fire codes. Usually, your city’s building or planning department handles this.

Step 5: Set Up Business Insurance

Insurance is an important safety net for your consignment store. It protects you from unexpected losses that could otherwise sink a new business. At minimum, consider these coverage types:

General Liability Insurance: This covers accidents or injuries that happen at your store and claims of damage your business operations cause. For example, if a customer slips and falls or if a product you sold somehow causes injury, a general liability policy helps cover medical or legal costs. This is fundamental coverage for any brick-and-mortar business open to the public.
Property and Inventory Insurance: Often obtained as a Commercial Property Insurance or as part of a Business Owner’s Policy (BOP), this covers your building (if you own it) and contents/inventory against disasters or theft. If a fire destroys your shop or someone breaks in and steals merchandise, this insurance would help pay to repair the damage and replace the inventory. For consignment stores, verify whether consigned items (which you don’t own) are covered. You may need an endorsement or a specialized consignment shop policy so that consignors’ goods are protected as well.
Workers’ Compensation Insurance: If you hire any employees, most states require employers to carry workers’ comp. This covers employees’ medical bills or lost wages if they get injured on the job. It works hand-in-hand with general liability to cover workplace injuries. Check your state’s threshold – even one part-time employee can trigger a requirement for this insurance in many states.
Other Coverage: Depending on your situation, you might also consider Business Interruption Insurance (covers lost income if your store has to temporarily close due to a covered disaster) or Crime insurance (for theft, fraud, etc.). These can sometimes be added to a BOP package. If you sell online, cyber liability insurance is another consideration. An independent insurance agent or broker can advise on the right mix for your store.

Many insurers offer tailored packages for retail and consignment businesses. Shop around for quotes.

Pro Tip: When comparing policies, look closely at deductibles and coverage limits, and ensure consigned inventory is addressed. Getting insured might feel like an extra cost, but it’s a vital part of protecting the business you’re building. One lawsuit or disaster without insurance could be devastating.

Step 6: Create a Consignor Agreement

A consignor agreement is the contract between you (the store, a.k.a. consignee) and your consignors (people who bring in items for you to sell). This document is absolutely key in a consignment business because it sets everyone’s expectations and protects both parties.

Always put your consignor terms in writing and have consignors sign the agreement when they bring in goods. You can find sample consignment contract templates online (LegalZoom offers a great template) to use as a starting point, but be sure to tailor it to your business and local laws (ideally, have an attorney review it). Here are essential terms your consignor agreement should cover:

Ownership of Items: Make it clear that the consignor retains ownership of their items until a sale occurs. In a consignment arrangement, the shop doesn’t purchase inventory outright, the consignor is simply entrusting items to you. Your contract should state that title to the goods remains with the consignor until the item is sold to a buyer, at which point ownership transfers to the buyer. You should also have the consignor affirm that they have legal title to the items and that the goods aren’t stolen or counterfeit, etc., to protect you from liability.
Consignment Period: Define how long you will keep items on the sales floor (60 or 90 days, for example). After that period, what happens to unsold items? Your agreement should spell this out: will you return unsold items to the consignor, or do you reserve the right to discount, donate, or otherwise dispose of them?
Pricing and Discounts: Many consignment shops have a policy like “10% off after 30 days, 20% off after 60 days” to help move inventory. If you plan to markdown items over time, state that you have the consignor’s permission to do so (or not – some agreements require consignor approval for any price drop). Also note if the consignor can set a minimum price or “no sale below $X” for high-value items.
Commission and Payout Terms: This is the heart of the agreement. Clearly state what commission or split the store earns and what the consignor earn (60% of the sale price to the consignor, 40% to you for example). Explain when and how you will pay the consignor their share.
Fees or Expenses: If you have any intake fees (say, a small fee per item or a one-time consignor setup fee) or if you charge the consignor for any costs (like cleaning or repairs of items), list those in the contract. Many consignment shops keep it simple with no upfront fees and just take the sales commission, but if you do have any other charges, disclose them clearly.
Loss or Damage Policy: Decide how you handle if an item is lost, stolen, or damaged while in your possession. Some contracts state that the store is not responsible for loss or damage (essentially, the risk stays with the consignor until the item is sold). However, this can sour consignor relationships.
Termination and Signatures: Include standard legal clauses: how either party can terminate the agreement, what happens if a consignor pulls their items early, and which state’s law governs the contract. Finally, have a signature line for both you and the consignor to sign and date; both parties should have a copy.

You can check out the consignor agreement terms of ConsignCloud customer Windance Boardshop.

Want to learn more about how Windance Boardshop became a nationwide seller of windsurfing gear? Check out our interview with Nick Caccavo.

How ConsignCloud Supports Legal Setup

Opening a consignment store involves more than just stocking inventory and finding customer. It requires setting up a solid legal foundation for your business. By choosing the right structure, getting your tax ID and licenses, and having proper insurance and contracts, you’re protecting the investment of time and money you’re making in your shop.

One way ConsignCloud helps business owners with business requirements is by helping you stay organized with financial reporting. You're able to configure your taxes directly in the system and easily export your reports into CSVs for you or your accountant to use or upload to accounting software like QuickBooks.