Congratulations! You’ve decided to follow your dream or your passion and start your own business. It’s an exciting time, and while you might be the best at your craft or have the most efficient product, without following the proper laws and regulations concerning business licenses and permits, your business may be over before it ever really starts. Even some entrepreneurs have been in business for years without getting the proper licenses. Don’t be that business owner! Keep reading to know why it’s important to comply with the proper licensing requirements and how to do it.
This article will help you determine what federal, state, and local business licenses and permits you may need, and how you can avoid the consequences of not having the proper documentation.
What Is a Business License?
A business license is a required (mandatory) approval, certificate, or permit that allows or authorizes a business to operate within a specific jurisdiction. In other words, government agencies can fine or shut down a business that operates without a license or operates with an expired license. There is usually a fee associated with the process.
A license is distinct from the papers filed with a secretary of state that establishes the business itself. It’s not the Articles of Incorporation (the document that states the type of business you have) nor any other operating document. Generally, every company with an income stream will be required to have some type of business licenses or permits to demonstrate the legal operation and compliance with government regulations.
There are two primary purposes for business licenses or permits. The first is to track revenue for federal or state taxes. The second purpose is to show a certain level of expertise to the public. For example, doctors, lawyers, cosmetologists, and the like must all have professional licenses, and they are often on display to the public. This shows that the business is accountable for its actions and that it takes appropriate measure to protect public health and safety.
How Do I Know If I Need a Business License?
Each business is different and, depending on the location, it can often be difficult for a newly incorporated business to know which business licenses are is necessary, what are the requirements, and how one can be obtained.
This is especially true for a home-based business or online businesses, where the company culture may be more relaxed and family owned and operated. It’s likely that your state government will require you to hold a home occupation permit. For many traditional office-type jobs, like consulting or freelancing, that may be all that is necessary. But for more involved companies that deal with the public by providing food, a service that requires physical touch, or nursing care, additional licensing requirements may apply.
Also, it is important to understand that government requirements change, and it’s regrettably easy to fall out of compliance if a company has been operating the same way for some time. It’s generally a good idea to reevaluate your license requirements in the following situations: when your company begins transacting business in another city, county, or state; when a new employee or executive is hired; when the company begins to produce a new product or offer a new service; and when another physical storefront is purchased, or a location is closed.
What Type of Business Licenses Are There?
There are several common licenses. Remember that many business licenses require annual or biannual renewal. You should develop your own corporate system to stay on top of deadlines and remind the person in charge of upcoming deadlines. In doing your research, you’ll see these are the most common types of licenses your business may need.
- General Business License: This identifies where and what jurisdiction covers a business and ensure that the proper taxing authorities are collecting revenue.
- Professional or Occupational License: Each state has its own requirements for certain services.
- Health Department Permit: For anyone producing sauces, baked goods, or other food products that might need to undergo inspection.
- Home Occupation Permit: These generally permit signage, noise, or other environmental conditions that might impact a neighbor’s use and enjoyment of his or her adjacent property.
- Sales Tax License or Registration: If you sell a product (online or brick-and-mortar) your business may need to collect sales tax from customers.
- Withholding Tax Registration: In some states, this required if you are the only employee.
- Fire Department Permits: If your business involves the use of any flammable liquids or will be outdoors, you may need a Fire Department Permit to ensure that you will prevent any fires or harm to the public.
- Zoning Permits: Zoning permits are required before you build or use an existing building for your business. In some cases, you may need to present in front of your cities planning commission before building.
Bear in mind that this list doesn’t end here: there are many other business licenses that depend on the types of business you want to operate.
Where to Go to Get My Business Licenses?
Getting the proper business licenses and permits is a process that basically involves 3 levels or steps:
Check with the Federal Government → Check with the State Government → Check with the City and County Government
Step 1: Federal Level. The Small Business Administration provides a list of industries regulated by federal agencies to see if your industry needs a federal license. The truth is only a few do (aviation, mining and drilling, radio or TV broadcasting, and interstate agriculture). Also, any establishment serving or selling alcohol requires a license from the Federal Government.
Step 2: State Level. Almost all types of businesses require permits or licenses issued by the state: retail stores, restaurants, car dealerships, construction business, health services, etc. Some of these permits and licenses are for tax purposes, while the purpose of others is to safeguard the safety and health of consumers.
To learn the exact licenses you may need depending on your business and state where you operate, go to your state’s main government website and search for “business license”.
Step 3: City and County Level. If you live in a larger or highly-populated city or county, chances are you also need licenses or permits administered by city or county governments. If the state government (step 2) can’t tell you the specific licenses your city or county requires, you’ll have to search for “business licenses” on your local government website.
What Happens If I Don’t Have a Business License?
Noncompliance can lead to exposure for legal liability (i.e., being sued), an audit, government-issued penalties, and can deter investors or opportunities for future growth. Neither state nor local ordinances will protect you from wrongdoing by your customers or employees. And, depending on the state, you might be personally liable because your company no longer exists as a matter of law.
Is Getting a Business License the Same as Registering My Business?
No, it’s not. Obtaining your business license or licenses and registering your business are completely different things, and most probably you’ll have to take care of both before opening your business in order to comply with the law.
Registering your business refers to the process of obtaining a DBA (“Doing Business As”) or, in other words, registering the name under you operate your business with the state or local government. A DBA is, therefore, a fictitious name that allows you to do business with a name different from your own personal name. Also, this way the government and the IRS can keep track of your business. To register a DBA you have to file with your Secretary of State. You can also file online using a site called LegalZoom.
Read more: better understand the difference between getting a business license and registering your business