Do you need a business license?

May 20, 2014


When you are starting a business, it can be hard to keep up with all the legal obligations. Most small business owners want their operation to be legit, but the challenge is you may not even know which legal obligations you are missing.

At CorpNet.com, we frequently get calls from new entrepreneurs asking just what they need to do from a legal perspective to start their business…do they need a license, do they have to register their business, and how? Here, I’ll break down the two key steps for making your business legit in the US, and they apply whether you are working from home or setting up shop in an office park or corner store.

What’s first: registering with the state

Before you can do anything else, you’ve got to register your new business with the state. In essence, this step provides a legal foundation for everything else to come. There are two different paths for registering with the state:

1. Filing a DBA for a sole proprietorship

The simplest way to register your business is to remain a sole proprietorship/partnership (the default business structure) and then register your business name via a DBA (Doing Business As). You can read more about this process here.

2. Creating a formal business structure by incorporating or forming an LLC

While more involved than the first option, this path offers the added benefit of protecting your personal assets from the liability of the business. If your business is sued or runs into some kind of financial trouble, the business will be on the hook (and not you personally). In addition, forming a corporation or LLC may lower your tax bill. If you’re interested in learning more or figuring out which business structure is right for your situation, check out the free Business Structure Wizard.

Next step: Getting your licenses in order

After your business entity is set up, it’s time to start thinking about any permits or licenses you need. While the first step sets up your legal foundation, licenses give you the right to operate your business. Whether you work from home or have an office/store, you most likely will need some kind of local license. Of course, the specific requirements will vary by your location and business type. As expected, a home contractor with employees will be more tightly regulated than a web designer.

There are numerous kinds of local permits and licenses that you will need to check out. The best way to make sure you have all your bases covered is to have a service research what you need for your business type/location. You can also contact your board of equalization offices directly; start at the state level and then move down to the county and city/town.

Here’s a summary of the potential licenses and permits 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.
  • Professional license: 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, then you will need to get a state sales tax license (if your business sells taxable goods or services). You can check with your 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.
  • Health permits: If your business is involved with selling products that are consumed by people (i.e. food) or that touch the human body (i.e. 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.

If your business is already in full swing, try to get your licensing requirements taken care of 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 upfront than having to face hefty fines (or even have your business shut down) if you are caught operating without the right paperwork.

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about the author

FreshBooks is the #1 accounting software in the cloud designed to make billing painless for small businesses and their teams. Today, over 10 million small businesses use FreshBooks to effortlessly send professional looking invoices, organize expenses and track their billable time.