Everything small business owners in the U.S. need to know about what a business license is, whether you need one and how to get it.
You’ve got a business but have you thought about a business license?
Most small business owners want their operation to be legit from day one, but the challenge is you may not even know which legal obligations you are missing.
In this article, you’ll learn how to secure a business license in the U.S. and why you need one in the first place.
What Is a Business License?
In a nutshell, a business license is a government’s permission to legally conduct business on a local, state, or federal level. The type of licensing depends on the nature of the business entity that applies for it and the location it’s going to operate in.
Licenses also certify that a business is compliant with laws and regulations of a given jurisdiction, and that you have the necessary skills to deliver the actual work.
While specific requirements depend on the location where you want to set up shop, most jurisdictions will require a general business license to get started, plus a couple more activity-specific documents to go with it.
Why Do I Need a Business License?
At the most basic level, business licenses help the government keep tabs on registered companies and protect the wellbeing of the public.
In other words, a licensed company can be easily monitored for compliance with health and safety regulations, and held accountable if they are breached.
On the financial side of things, business licenses make it possible to track cash flow and resulting taxes. In a similar fashion, local governments issue licenses to generate revenue within their jurisdictions.
It’s important to note that obtaining a business license is only part of the legal requirements you have to meet before starting your venture.
In a nutshell, a business license is a government’s permission to legally conduct business on a local, state, or federal level.
First Things First: Register Your Business
Before you can do anything else, you have to register your new business with the state. In essence, this step provides a legal foundation for everything else to come.
There are several ways you can structure your company, each with their respective merits and drawbacks. For the purpose of this article, we’re going to focus on the two most popular choices for small business owners:
1. Becoming a Sole Proprietor
The most hassle-free way of forming a new business is to structure your company as a sole proprietorship. It means that you can run your business under your own name and don’t have to register a new entity for that purpose.
Being a sole proprietor gives you full control of your enterprise:
- All the profits go into your pocket
- You take advantage of simplified paperwork
- You’re free to restructure your company as you see fit
The major downside of this approach is that you are your business. If your fledgling company runs into financial or legal troubles, you’re the only person that’s going to face the aftermath. This liability also extends to your personal assets.
2. Forming a Limited Liability Company (LLC)
While more involved than the first option, forming an LLC is a sound choice if you’re planning to open a bigger business and bring other members into the company.
An LLC gives its members an additional layer of legal and financial protection that separates personal and company assets. For instance, if an LLC is sued or faces financial trouble, the business will be on the hook (and not you personally).
Despite the appeal of an LLC, you should keep in mind that startup and operation costs are going to be higher than for a sole proprietorship. You’ll also have to pay self-employment taxes (unless taxed as a corporation) and be subject to stricter record-keeping regulations.
You can learn more about LLC taxation in the FreshBooks Learning Hub.
3. Filing a DBA
If you’re a sole proprietor and don’t want your business to bear your name (which is the default), you need to file a DBA (Doing Business As) document that lets you use a fictitious business name instead.
To avoid confusion and make consumers aware who they’re dealing with, this requirement also applies when an LLC wants to conduct business under a different name.
You can read more about filing a DBA here.
How to Obtain a Business License?
With the know-how in place, the nagging question that remains is, “How do I get a business license?” Although we’d love to give you a straightforward answer, for now, you’ll just have to do with, “It depends.”
Since licensing depends on the type and location of your business, you’ll first have to conduct a small investigation into the regulations specific to your area and jurisdiction.
Here Are a Couple of Things That Will Get You Started
Your best bet at finding the specific requirements for your area is a simple Google search. For instance, if you want to open a business in California, search for “business license requirements” + “California.” The top result yields the California Secretary of State’s page, which then references CalGold, a permit assistance resource.
The Small Business Administration suggests reviewing online resources available on state, county and city websites. Some governing bodies accept online applications while others share printable documents you can submit directly to their offices.
Applying for a business license is usually associated with a fee that varies depending on your area. Since you’re likely to require several licenses for your business, you should calculate the expense into your business startup costs. Most licenses are also subject to renewal, which means additional fees in the long run.
Some industries are regulated on a federal level and you’ll need a federal license to conduct business in those fields. For example, a liquor store requires a license issued by the Alcohol and Tobacco Tax and Trade Bureau (TTB) while a basement radio station would need to request one from the Federal Communications Commission (FCC).
Other Federal-Regulated Industries Include:
- Fish and wildlife
- Maritime transportation
- Firearms, ammunition and explosives
- Mining and drilling
- Commercial fisheries
- Nuclear energy
- Transportation and logistics
Remember that you need the licenses and permits before you set up shop and start conducting business. If you intend to expand the business to another city, county or state, chances are you’re going to need separate licenses before doing that.
What Are the Types of Business Licenses?
Whether you work from home or have an office/store, you will need some kind of license to conduct legal business. As expected, a home contractor with employees is more tightly regulated than a freelance web designer.
Here’s a summary of the potential licenses you might need:
General Business License
Most business types will need to get a general business license. This is basically an annual license issued by your local city or county that lets you legally operate a business in the area.
Some professionals, such as a plumber, contractor, or accountant, will need a license to demonstrate their proficiency. If you’re a freelance writer, software developer, designer, or consultant, you won’t need a professional license.
Sales Tax License
If you live in a state that charges sales tax, you will need to get a state sales tax license (if your business sells taxable goods or services). Check with a state revenue agent to see if your services are considered “taxable” or not. Generally speaking, this mainly applies to the retail sales of goods, although some labor services may also be taxable.
Apart from business licenses, you’ll also need business permits that regulate things like business activity in residential areas, fire safety, or land use, just to name a few.
You probably wouldn’t want your next-door neighbor manufacturing and selling dangerous chemicals out of their garage. Zoning regulations and permits prevent such things from happening.
Some types of business permits include:
- Health permits: If your business is involved in selling products that are consumed by people (e.g. a food supplier) or that touch the human body (e.g. a nail salon), then you’ll need a local health permit from your city or county with an annual inspection. Examples of these businesses include restaurants, food trucks, street vendors, wholesale food manufacturers, beauty salons and tattoo parlors
- Signage permits: In some locations, you will need to get a permit from your county/city zoning department before you can put up a sign for your business
- Fire permit: You will need to get a permit from the fire department if you have a physical space that’s open to the public, or if your business will be using any flammable materials
- Home occupation permits: In some places, you’ll need to get a permit for a home-based business, even if you’re just running a blog from your computer. You can check with your city/county planning department to find out if it’s necessary
What Can Happen If I Don’t Have a Business License?
If you fail to secure necessary permissions or forget to renew your licenses, you might face consequences that can hurt your finances, prompt legal action or cripple your reputation.
Sometimes a company can cease to be compliant with licensing regulations when it introduces a new product or service into its offer. For that reason, make sure to consult with a chartered professional accountant (CPA) before making any changes to your current business model.
The repercussions of operating without a business license can range from fees and penalties applied by authorities all the way to business closure.
Fines and Penalties
The entry-level consequence of running a business without a license can be a fine or penalty imposed on your company by city, state or federal authorities.
The amount due depends on many factors, including the location of your business. For instance, the late-payment penalty for business license renewal in Seattle is $20 while the same demerit in Atlanta will run you a hefty $500.
While some jurisdictions will charge a flat-rate penalty for operating without a valid license, others may calculate it based on the revenue of your business. Either way, you should always remember to settle licensing fees before you engage in business activities.
Apart from the financial penalties, operating without a valid business license can also incur legal troubles such as lawsuits or even arrest.
Customers and vendors who interact with your business expect your company to operate legally. If word gets out that you’ve been providing services without required qualifications or permits, your business partners may want to take legal action for damages or lost reputation.
Can you really get arrested?
While absentmindedness probably won’t put you behind bars, dodging licensing regulations can. Last year, a Richland County cellphone store owner was arrested when he continued to run his business even after his license had been revoked due to unpaid taxes.
If you fail to secure required licenses in a timely fashion, authorities can decide to shut down your operation and even seize equipment on the spot.
A temporary business closure may not be the end of your company but it’s sure to hurt your cash flow. In the long run, it could bring negative press and damage your customer base.
If your business is already in full swing, get your licensing requirements in order as quickly as possible. For a new business, you’ll want to get the paperwork in before you open your doors or start taking in revenue.
Getting your permits and registration in order can be a relatively easy task. And it will be far less painful to deal with the permitting up front than having to face hefty fines (or even have your business shut down) if you are caught operating without the right paperwork.
This post was updated in November 2019.