Do you have a great idea for a business that you can't get out of your head? Maybe it's something you've always loved doing, like building furniture or fashion design. Maybe you've finally saved up enough money to expand your landscaping side gig. You have spent countless hours on the computer creating your business plan; you created a logo and a website; you've even scoped out office locations and potential clients. So what happens next? Unfortunately, even the greatest business plan can't get off the ground without some paperwork, legal agreements, and a business license.
Some of history's most successful businesspeople started out as entrepreneurs: think about the humble beginnings of Bill Gates, Henry Ford, even Oprah Winfrey. An estimated 27 million Americans are currently starting up or running new businesses, and approximately 50% of those businesses are run from private homes. Entrepreneurship is the backbone of America's business landscape, but this doesn't mean it will be easy. To ensure your business will be as successful as possible and get off on the right foot, it is essential to follow the legal steps and guidelines. Securing your business license is just the start!
What Is A Business License?
The short answer is that a business license is what allows you to legally operate your business within a certain governmental jurisdiction or area. The type of business license depends on what goods are being sold or what services are being provided. Depending on the type of business, you may also need to secure permits from different state departments, fill out specific tax certificates, and be held to special rules and regulations. The type of business license you apply for will depend on the structure of your business; you may have to research the different types of business structures and decide which is best for you.
Types Of Businesses
Sole Proprietorship: This is the most popular form of small business ownership and the easiest type to start up and maintain. In the case of a sole proprietorship, the owner keeps complete control but is also personally liable for losses and risks.
Partnership: A business is owned and controlled by two or more people and every owner has a share in the profits and losses.
LLC: A limited liability company is like a hybrid between a sole proprietorship/partnership and a corporation. The owners are seen as being separate from the business, yet there is management flexibility.
Corporations: A corporation requires its own set of state and federal laws and regulations. A corporation is a separate entity from its founders and owners.
State Licenses And Permits
Every state has its own rules and regulations for applying for a business license. If you are starting a business under a name other than your own, you must apply for a DBA certificate, also known as a "doing business as" certificate. In New York State, for example, you must apply at your local County Clerk's office for a business certificate and pay the specified fee.
If you will be selling goods that require sales tax to be collected, you will also have to register with the state's Tax Department and obtain a Certificate of Authority. Depending on your city, town, or village, you may also have to get specific local business licenses and certificates in order to operate. Contact your local town or village office as well as your county clerk for specific local permit information.
Federal Licenses And Permits
So you've secured your local permits and state licenses; now you have to make sure you are fulfilling your federal obligations! If you are going to be hiring employees, you will have to register with the Internal Revenue Service (IRS) and receive your Employer Identification Number (EIN); this is how you will be identified legally for tax purposes. If you are going to be establishing a nonprofit organization, you will also have to obtain a nonprofit license. This can be a lengthy process, and there are numerous types of nonprofit entities; however, this is the only way to receive tax exemption status.
Do I Need A Business License Or Other Permits?
If you want your business to be legal, compliant, and successful, then yes—you need a business license! The risks of not complying legally outweigh any possible benefit.
Identification And Legal Recourse
Filing your business license will identify your business and keep track of finances for tax purposes. Being a legal business means you can become a member of business organizations, chambers of commerce, and local entrepreneur groups. Membership in these groups can essentially bring you new customers and a steady stream of revenue. Support from fellow entrepreneurs cannot be understated! They are a rich source of information and advice to those just starting out.
If you file as a partnership, LLC, or corporation, a legal filing will also help you in case of court matters and complaints. If you do not file a business license or adhere to permit requirements, you will be legally unprotected. Not only can you be held criminally liable, but your business could be shut down and forced to pay penalties and taxes. Without an official business license or permit, banks may not allow you to open a business checking account.
Taxes are, unfortunately, a necessary reality. Doing business without proper licensure is a crime; doing business and not collecting or paying taxes can lead to major financial issues. If you are operating a business in a state that requires sales tax and you aren't collecting it, you will be required to pay for it out-of-pocket. If you are caught doing business unlicensed, you will be held responsible for past taxes and fees as well as penalties; not to mention lawyer and court fees.
Types Of Permits And Licenses
A business license and permit depend on the type of business you are embarking on and the location of your business. You may need to secure one, or more than one, of the following licenses and permits:
- Business License / DBA (doing business as) Certificate
- Certificate of Partnership
- LLC or Corporation Certificate
- Zoning Permit / Building Permit
- Occupational Permit
- Sales Tax Collection
- Health Department Permit
- Fire/Police Department Permits
- Signage Permit
- Alcoholic Beverage permit
- Hazardous Waste permit
- Nonprofit Organization tax-exempt status
How To Get ABusiness License
Obtaining a business license depends on several factors: your local city or town, the state you reside in, the type of business you are starting, and the business structure.
The first step should be contacting your local municipality. Most local governments have this information and official forms readily online but if not, you can call your local County clerk. Before you file, choose your business structure (sole proprietorship, partnership, etc) and your company name. This will determine what type of business license you have to apply for. You may also have to pay a filing fee for the license and additional fees for certified copies of the license application. You can do a local search via your town or county website or even through small business association websites.
Once you are locally recognized by your city or county, you may have to seek permits from state legislative bodies. If you are looking to expand your home-based daycare to a preschool setting, for example, you would have to contact your state's Department of Education, State Board for Charter Schools, or Office of Children & Family Services. Every state is different so be sure to check online or contact the governing boards directly. Even cities can have their own rules and regulations; for example, New York City has its own separate license and permit requirements from the State Department of Education.
Depending on your business, you may also have to apply and pay for Federal licenses and permits from the various government bodies. Some requirements, like obtaining your Employer Identification Number from the IRS, are free; others, such as applying for nonprofit status, can cost several hundred dollars. Below is a sampling of types of businesses and what federal agency you will contact:
- Agriculture (transporting animals or animal products): US Department of Agriculture
- Sale or manufacturing of alcoholic beverages: Alcohol and Tobacco Tax and Trade Bureau
- Aviation (private or public transportation via aircraft): Federal Aviation Administration
- Sale or dealing of firearms: Bureau of Alcohol, Tobacco, Firearms, and Explosives
- Radio and TV Broadcasting: Federal Communications Commission
- Transportation (trucking): US Department of Transportation
- Nonprofit Organizations: Internal Revenue Service
Starting a new business is no easy feat. Even the greatest idea can fall flat without proper preparation, research, and patience. Seek out support through local small business associations, chambers of commerce, and online chat groups. Ask questions to ensure you have all the pertinent information. Securing your business license isn't the first—nor the last—step in running a successful business, but it is one of the most important starting points. To get your business off on the right foot and establish yourself as an ethical and legitimate businessperson, it is essential to secure a permit or license.