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 licensing requirements, your business may be over before it ever really starts. So, should you obtain any business licenses?
Getting the right business licenses or permits don’t have to be complicated or expensive. But it is important. Take a look at this article and complete the Growth Evaluation to get personalized advice about your individual needs for your unique business. This will help you determine what federal, state, and local 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. It is required only if the business is operating under a name different from the name of the owner, or generally anything other than a DBA.
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. Again, completing our Growth Evaluation might help guide your research: we can provide you with a list of specific licenses your business may require. 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 their 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.
Do I need to register to pay taxes?
Most likely, yes. The IRS requires that some businesses receive a federal tax identification number, also called Employer Identification Number (EIN) or Individual Taxpayer Identification Number (ITIN). This is basically like the Social Security Number for your business, and it shows that your business is a legal entity separate from you.
Learn here everything you need about ITIN and how to apply for one.
Some states, like Texas, require you to file tax-related documents even when no taxes are owed and register for a state tax ID number. Because each state can vary in its taxing requirements, check with local authorities about sales tax, unemployment insurance tax, and other tax withholding.
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.
How do I make sure I have the right license or permit?
There’s no sense in losing sleep or stressing over whether your small business has the right business licenses or permits. Instead, complete this simple questionnaire: the Camino Financial Growth Evaluation. It’s free, you don’t need to submit any document, and it will only take you a few minutes. Besides guidance on how to grow your business, you’ll get personalized advice about what your company in your state needs to thrive and comply with all rules and regulations.