Business licenses are a requirement in most cities and states when you start a new enterprise. These legal documents ensure that your company meets the minimum standards established by the city, state, and federal governments for the transactions you plan to do.
Why is it difficult to figure out what licenses you need when starting a new business or how to get them?
The problem with business licenses is that there are so many different government agencies that oversee businesses. These include:
- Federal licenses (such as from the Federal Communications Commission for broadcasting, the U.S. Department of Agriculture for animal products or biotechnology, and the U.S. Department of Transportation for specific types of shipping businesses);
- State licenses (for construction, hazardous materials handling, food preparation, and child care businesses), and
- Local licenses (for food preparation, selling liquor or tobacco, and zoning issues).
In addition to business licenses, individuals within the business may be required to have trade licenses. People who work in industries like plumbing, hairdressing, teaching, medicine, accounting, and real estate must take classes, pass tests, and, often, maintain a continuing education schedule. These professional licenses ensure a minimum standard of knowledge and consumer care.
The different types of licenses and the rules about each can be confusing. Pay particular attention to the renewal requirements for trade and business licenses, as renewing professional licenses often requires keeping up to date on changes in one's industry, including taking classes.
The most common business license is called a general license. Businesses that seek to sell products need a general business license to collect state sales taxes. These taxes must be turned over to the state department of revenue. An audit may be triggered if a business's tax returns show a profit but no taxes are submitted to the state.
For sales tax reporting requirements, online businesses may require a business license according to their location or the location of their sales. States require most businesses that sell goods to collect taxes or comply with local permitting guidelines (such as preparation and packaging food products) or zoning restrictions for manufacturing or shipping goods.
What is a Business License?
A business license is a way for a local, state, or federal agency to ensure the safety of customers and residents by requiring businesses to meet minimum standards. These standards usually include the following:
- The principal must have certification in the type of business or industry (such as an individual plumbing trade license for the president of a plumbing company);
- Appropriate business insurance or bonding coverage;
- Approving the location of the business (sometimes homes are not appropriate for certain types of businesses, like a trucking company based in a residential neighborhood);
- Specific regulations and benchmarks to meet before the business can open to retail customers (such as hygiene requirements for hair salons and handicapped access guidelines for stores).
Once a business has a license, it must maintain the standards required by the terms of its permits and the licensing authority.
Do not confuse a business license with incorporating a business, such as by creating an LLC, sole proprietorship, S corporation, or other types of business ownership. Incorporating a business requires registering with the secretary of state's office and with the Internal Revenue Service. This creates a business entity, but a business license is not required until you start making transactions with customers as part of that business.
Why Do You Need a Business License?
Laws require that many types of businesses be licensed to ensure that they meet minimum standards of knowledge and have access to best practices for their industries. Companies that operate without the required permits and licenses are liable to be fined and, possibly, shut down until they comply with the license requirement.
Business licenses also alert other state and local officials to the business's existence, triggering inspections and audits. For instance, businesses registering with the state for tax purposes must submit taxes collected (such as state or local sales taxes). The state may investigate if taxes are not received from a registered business. Likewise, businesses that register for food sales are subjected to periodic reviews and inspections by health authorities. These inspections ensure that food is prepared correctly, kept at a specific temperature, and that the area is clean and free of contamination, rodents, and insects.
Types of Business Licenses and Permits
Requirements for business licenses vary from state to state and city to city. Businesses that sell products or services are expected to collect sales taxes, so they need a general business license (sometimes called a D.B.A. for Doing Business As). This document records the owner's name, home address, place of business, partners' names, and other specifics.
City departments may require permits for certain businesses. Without the necessary permits, a business license may be suspended or the owner fined.
Making sure that your business meets all of the license and permit requirements takes time. Some cities even require a permit for a sign outside your place of business, and city permitting boards may not meet frequently to consider applications. It's important to plan for these obstacles and pre-opening inspections.
How To Get a Business License
- Form Your Business Entity
- Apply for an Employer Tax Identification Number
- Determine Which License(s) You Need
- Apply for a Business License
- Comply with License Requirements and Pay Attention to Renewal Dates
Conclusion
If the process of getting a business license is confusing, check with your state department of commerce or department of revenue and the local city hall for help. Most will have written guidelines to help ensure you complete every step necessary because it's in their best interest financially to encourage new businesses that meet the needs of residents and bring in tax money.
Getting a business license can seem onerous, but it's better to comply with established laws than suffer the consequences like fines and civil penalties.
