The merchant of record advantage
Check Reddit and you’ll find plenty of horror stories. A software maker wakes up to a frozen Stripe account and no way to access their funds. It doesn’t happen often, but when it does, there’s little you can do.
In the early days, simply getting paid felt like a victory. But as you start scaling, the threats multiply: PayPal or Stripe suddenly terminating your account for vague “compliance violations”, costly chargebacks eating into your margins, or tax authorities from countries you’ve barely heard of demanding years of unpaid VAT with penalties.Â
The digital tax landscape is a minefield. Over 30 countries have introduced digital services taxes, each with complex requirements. In the U.S., it’s even more chaotic. Alabama has over 900 tax jurisdictions, and Texas exceeds 1,900, each with unique rules.Â
This is why thousands of successful software businesses partner with a merchant of Record (MoR): to eliminate these business-killing risks, handle payment processing complexities, manage global tax compliance, and absorb legal liability. An MoR handles all the complex regulatory burdens so you can invest every minute and dollar into what actually matters: building an exceptional product and growing your customer base.
What is a merchant of record?
A merchant of record is the legal entity responsible for selling your product. Acting as the official seller, the MoR handles taxes, global compliance, payments, and chargebacks on your behalf. This allows you to focus on building and improving your software, while the operational and legal complexities of selling it are taken off your plate.
Think of the MoR as the link between you and your customers — quietly running the entire purchase process behind the scenes.
How does a merchant of record work?
A merchant of record becomes the legal entity on the invoice — shielding you from liability.
A merchant of record calculates, collects, and remits taxes globally so you don’t have to.
A merchant of record optimizes your entire revenue infrastructure, from checkout to subscription management.
Here’s what happens behind the scenes when a customer makes a purchase through a merchant of record:
The customer checks out
They choose a product or subscription and initiate the purchase through a hosted checkout directly on your site.
Your platform hands it off
Payment details are passed directly to the MoR system, never touching your servers.
Approval is requested
The MoR reaches out to card networks (like Visa or MasterCard) to get the payment authorized.
Money moves
Once approved, the MoR processes the transaction and transfers the funds from the customer’s account.
Taxes are sorted
The MoR calculates the correct sales tax or VAT, collects it, and makes sure it gets to the right tax authority.
Fraud is filtered out
It checks for suspicious activity and steps in to handle chargebacks or disputes if they happen.
Confirmation is sent
A receipt or invoice is generated and sent to the customer on your behalf.
Why do software businesses need a merchant of record?
Because sooner or later, every founder runs into the same tough questions:
"How do I navigate tax laws that change constantly across 30+ countries?"
"What happens if I miscalculate VAT or miss a filing deadline?"
"How do I stop sophisticated fraud without blocking legitimate customers?"
"How can I build a subscription system that handles edge cases and recovers failed payments?"
An MoR eliminates these headaches — giving you back your nights, weekends, and peace of mind.
The DIY alternative?
It’s tough to quantify the hours spent each week juggling payments, researching tax regulations, and staying on top of compliance. But as your business grows, so does the time — and cost — of doing it all yourself. Every minute spent chasing tax obligations is time taken away from building your product and growing your business.
The benefits of using a merchant of record
Instant global reach
Software makers can launch their business globally from day one with proper currency conversion, localized payment methods, and automatic tax compliance for each market.
Makers often limit the market to their own country or region due to the complexity of handling multiple currencies, payment methods, and tax regulations across different countries.
Instead of spending months researching tax requirements for Brazil or payment preferences in Japan, you can immediately sell to customers in hundreds of countries with localized checkout experiences.
Note: The Freemius Checkout is available in 7 languages: English, Spanish, French, Italian, Dutch, Bengali, and German.
Conversion-optimized checkout
Software makers can use checkout flows proven across thousands of transactions, optimized for conversion and equipped with smart systems to recover abandoned carts.
DIY checkout solutions often leak potential customers, with abandonment rates reaching 70% due to friction points in the purchasing process.
Payment processor account protection
With a merchant of record, you’re protected from having your payment processor account shut down. That’s because the MoR owns the relationship with the processor and handles disputes on your behalf.
When you use Stripe or PayPal directly, it doesn’t take much to trigger a suspension.Â
Early-stage products are especially vulnerable. Without a long payment history, just a few disputes can push your dispute rate above the 0.75% threshold, which can lead to immediate account termination with limited options to appeal.
Chargebacks can happen for different reasons. It might be card-testing fraudsters, or even a competitor using stolen credit cards to trigger fake subscriptions. But more often, it’s something unintentional. For example, if you launch a desktop app and a bug prevents customers from receiving the download email, they might dispute the charge simply because they didn’t get what they paid for.
In any case, only 5 disputes out of 100 transactions could take your product offline. That can derail a new launch and force you to scramble for alternative ways to keep your business running.
Complete subscription engine
Software makers get a tested subscription system that automatically handles the entire lifecycle without writing a single line of code.
Building subscription infrastructure requires complex billing logic, handling failed payments, managing upgrades/downgrades, and creating recovery workflows.
After implementing automatic renewal reminders and smart retry logic for failed payments, you may be able to recover a portion of lost revenue and reduce the volume of support tickets.
Global tax compliance
Software makers can let the MoR team handle regulatory changes, keeping the business protected without diverting their attention from product development.
Staying compliant with constantly evolving regulations like PCI, EU VAT, and sales tax across different jurisdictions requires constant vigilance and expertise.
Example: When new EU VAT rules came into effect in 2021, software makers using Freemius continued selling without interruption while many self-hosted shops scrambled to update their systems or temporarily blocked EU sales.
Revenue protection
Software makers benefit from enterprise-grade fraud detection systems implemented by the merchant of record, who also handles disputes to minimize losses and protect revenue.
Chargebacks and payment fraud can devastate small businesses, with losses often reaching thousands of dollars before detection patterns emerge
Developer time reclaimed
Building and maintaining e-commerce infrastructure can consume a lot of development resources that should be focused on your core product.
One integration replaces months of development work and ongoing maintenance, freeing your team to focus on what they do best.
Instead of spending six hours every Saturday working on taxes and related admin matters, Melapress founder Robert Abela now gets his weekends back while he rests assured his business compliance is in safe hands.
Product focus
Software makers can outsource the entire commerce infrastructure to focus exclusively on building features customers love.
Many software makers become accidental e-commerce experts rather than excelling at their core product offering.
For example, by eliminating payment infrastructure maintenance, you can redirect that time to launching new features and improving your product to keep up with your customers’ needs.
Common myths about merchant of record solutions
Myth:
I'll sacrifice control over my customer relationships.
Reality:
You maintain 100% ownership of customer data and communication channels. An MoR handles the transaction infrastructure in the background while you build lasting customer relationships.
Myth:
It's more expensive than building my own solution.
Reality:
For micro and small software businesses with less than $200,000 ARR, building your own solution is actually more expensive. When you calculate developer costs ($100-150/hour), compliance experts ($200+/hour), legal counsel ($300+/hour), tax software, payment processing, and fraud tools — plus opportunity cost — the DIY route adds up fast.
Myth:
Who cares about taxes? I'll deal with it when I get big enough.
Reality:
Tax liability begins with your first sale, not when you "get big enough." While authorities may not pursue you immediately, many can enforce retroactively, collecting years of unpaid taxes (FYI: the IRS looks back up to 6 years) plus interest and penalties.
In the EU, VAT obligations apply instantly when selling to certain countries, regardless of revenue. US states like Maryland and New York might only act after you cross economic nexus thresholds, but they'll examine your entire sales history once they do.
What starts as a simple administrative task can escalate into a costly six-figure problem — like a leaky roof that's cheaper to fix now than deal with the extensive damage later.
Myth:
I can just connect Stripe or PayPal and handle the rest.
Reality:
Payment processors manage only 20% of what selling software requires. You'd still personally shoulder tax compliance, legal liability, and building an entire subscription infrastructure from scratch.
Myth:
I can handle tax compliance myself.
Reality:
Digital tax laws changed in 19 countries last year alone, with each jurisdiction enforcing unique thresholds, filing requirements, and penalties. Without specialized expertise, you're gambling with your business's future.
Merchant of record vs. payment processor
An MoR manages the entire sales process for you, including tax compliance, invoicing, and fraud prevention, while a payment processor mostly facilitates transactions. The table below highlights the key differences to help you decide which is the better fit for your software business.
| Capability | Payment processor | Merchant of record |
|---|---|---|
| Accepts payments | ||
| Legal seller of record | ||
| Invoicing | +0.4% extra cost | |
| Tax calculation | +0.5% extra cost | |
| Tax registration and filing | ||
| Fraud prevention | Extra cost | |
| Chargeback defense | ||
| Subscription management | ||
| Global compliance | ||
| Software licensing | ||
| Marketing automation | ||
| Localization |
When to consider a merchant of record
Here are six specific triggers that signal it’s time to consider offloading tax, compliance, and payment processing burdens to a merchant of record:
Your international customer base is growing (or you want it to)
Selling globally isn’t as simple as flipping a switch. Different countries mean different tax rules, currencies, compliance standards, and payment preferences. A merchant of record helps handle the operational and legal complexity without slowing you down.
You're transitioning to a recurring revenue model
Subscriptions unlock predictable revenue, but they also come with challenges like failed payments, dunning, upgrades/downgrades, and prorated billing. MoRs often come with built-in tools to manage this complexity at scale.
Your DIY e-commerce stack is becoming a maintenance nightmare
Piecing together checkout, licensing, payments, tax, and reporting can work in the early days — but over time, updates break things, integrations go stale, and your team ends up firefighting more than building. An MoR centralizes and maintains this infrastructure for you.
Compliance concerns are creating real business anxiety
Worried about VAT, GDPR, PCI, or sales tax in the U.S.? You’re not alone. A good MoR takes on the legal liability of being the seller of record, shielding you from potential missteps and letting you stay focused on what you do best.
You need to scale efficiently without expanding headcount
Hiring and training people to manage payments, support refunds, deal with chargebacks, and chase tax filings can quickly eat into your margins. An MoR acts as an extension of your team (without adding to your payroll).
You want to focus on product excellence, not payment processing
The more time you spend on operational logistics, the less time you have to improve your product. If your goal is to build something great and not become an expert in sales tax or compliance, an MoR can help keep your priorities in check.
How to choose a suitable merchant of record
Selecting the right merchant of record is a critical business decision that impacts operational efficiency, compliance posture, and growth potential. Here’s how to evaluate options:
Key considerations:
- Does the MoR serve businesses at your current growth stage, or only large enterprises?
- Are there minimum revenue thresholds that might disqualify smaller businesses?
- Will their onboarding process accommodate your launch timeline?
- Can their platform be integrated before your website goes live?
- Will you have access to meaningful support, or just generic Tier-1 responses?
Key questions to ask:
- Does the MoR understand software-specific needs?
- Do they offer specialized tools for your specific business model (SaaS, plugins, desktop applications, etc.)?
- Can they demonstrate expertise in the specific market segment?
Evaluation criteria you should apply:
- Comprehensive SDK availability for the technology stack
- Documentation quality and developer resources
- Average integration timeline (days vs. weeks)
- Support responsiveness during implementation
Look for these must-have features:
- Flexible subscription management (prorations, trials, upgrades)
- Revenue recovery tools (dunning, payment retries, cc expiration updates)
- Checkout optimization and A/B testing capabilities
- Multi-currency and payment method diversity
Use the following verification points:
- Number of supported tax jurisdictions (should exceed 100+)
- Proactive regulatory updates and implementation
- Handling of digital-specific tax rules (reverse charge schema for VAT, B2B exemptions)
Deal breakers to keep top of mind:
- Transparent fee structure
- No minimum revenue requirements
- Reasonable notice periods for any terms changes
- Clear customer data ownership policies
Long-term value to look for:
- Access to conversion and revenue optimization expertise
- Strategic guidance beyond technical implementation
- Track record of evolving with client needs
How to get started with a merchant of record
Transitioning to a merchant of record like Freemius is straightforward and designed to minimize disruption to existing business while maximizing immediate benefits.
The five-step implementation path
Sign up with a Google or GitHub account in just one click
Configure pricing, plans, and checkout experience
Integrate in minutes (Freemius provides SDKs and 5-min integration guides)
Add checkout to the site
Launch globally with complete tax compliance
Merchant of record FAQ
Is Freemius suitable for SaaS or only for plugins and themes?
Freemius works great for SaaS too. While it started in the WordPress ecosystem, our APIs, webhooks, and SDK-free setup support any type of software product — desktop apps, SaaS, browser extensions… you name it.
How does Freemius differ from Paddle, FastSpring, or LemonSqueezy?
Unlike generic digital goods platforms, Freemius is purpose-built for software businesses, offering specialized licensing, distribution tools, and marketing automation tailored to the unique needs of software products and their customers.
How quickly can I implement Freemius?
Most customers complete technical integration in 1-3 days, with full implementation and testing finished within a week. Our focus on exceptional DX for software products dramatically reduces development time.
Do I need to be a legal entity to sell through Freemius?
In most countries, you can start selling as a self-employed individual without forming a company first. Freemius handles the compliance infrastructure and financial operations, letting indie developers and solo makers monetize their products right away.
How does Freemius help me grow revenue?
Beyond payment processing, Freemius includes built-in tools for conversion optimization, license upgrades, user segmentation, automated upsells, and churn reduction — all designed to maximize your customer LTV.
What if I already have an existing user base and want to migrate?
No problem. Freemius offers detailed migration documentation and hands-on support to help you move existing customers, subscriptions, and licenses with minimal friction.
Get started with Freemius as your merchant of record
Stop playing tax accountant, payment engineer, and compliance officer. Return to building software that matters.
- Book your personalized strategy session
- Create your account and explore the Freemius Developer Dashboard
- Access our comprehensive documentation
No revenue minimums. No long-term contracts. Just results.
Find all the tools you’ll need to create advanced websites in one place. Stop waisting time searching for solutions.
