The road to owning your own business is both a steady climb and a milestone. One day, you’re hesitantly agreeing to your first freelance gig (okay, so you helped out a friend for a free lunch). The next, you have a handful of steady clients and are about to launch your professional business website.
These days, it may seem like all you need is a nice logo, an active social media account, and voila — you’re in business. But before you can officially consider yourself a business owner — even a small business owner — there’s some amount of paperwork that needs to be done.
The process varies depending on the type of business you’re operating and where you’re operating from. Thankfully, for a small new business, the process for filing licenses and permits isn’t very hard and can offer many benefits down the road.
This article covers all the business license basics, who needs them, why they’re necessary, and how to begin the application process.
What Is a Business License?
A business license is a permit given by the local government that allows an individual or company to operate within its geographical jurisdiction.
Note that a business license is different from a business registration. While a license authorizes you to open and conduct business, a registration enters those new business details (your business name, tax data, contact information, etc.) into government files.
Who Needs a Business License
Pretty much anyone who engages in regular financial transactions for the sale of goods and services will need at least one type of business license.
There are some exceptions. Most independent contractors or freelancers who operate under their own name typically don’t need a business license. This includes writers, graphic and web designers, and consultants.
(Those in a specialized trade, however, such as aesthetics, law, medicine, insurance, finance, or security services, are required to secure an occupational license.)
If an individual only occasionally sells their goods and services or consigns them to another retailer, they may also not need a business license.
However, just because you aren’t required to have a business license doesn’t mean you’re exempt from paying income or sales tax. You may even incur more expenses, as you are unable to claim business tax credits or deductions, and are personally liable for any damages that may result from your goods or services.
Why Get a Business License
Business licenses are required for a number of reasons. Yes, they allow the government to track a business’s finances for tax purposes and generate revenue for local governments.
But they also help identify businesses, hold them accountable for their actions, and protect the public health and safety. Businesses that deal with the general public, such as agriculture and aviation, are further required to obtain specific federal licenses and permits.
In fact, many suppliers, investors, and customers often prefer to deal with businesses that are licensed. So even if you may not need a license, obtaining one is a great way to open doors and help your business grow.
A licensed business also creates an entity separate from yourself. This protects you against certain liabilities, depending on the particular setup. And while a separate entity does require filing a separate tax return, it also enables you to deduct expenses you wouldn’t be able to deduct from your personal taxes.
An added benefit of owning a licensed business is having access to a wide network, such as the Entrepreneurs’ Organization, the Better Business Bureau, startup communities, and other helpful organizations.
The Types of Business Licenses
Licenses are available on three levels — local, state, and federal — so it really depends on where your business is located.
At the local level, you’ll need at least a local business license to operate within the country or the city limits.
Consultants and freelancers are usually home-based, which is relatively easier to apply for. Sometimes, all you need is a Home Occupation Permit. This allows you to operate out of your principal residence, while implementing some common sense guidelines — employees may not live in the residence, only a limited number of clients can visit each day, signage and window displays are to be kept at a minimum, etc.
Those who plan to start commercial operations out of their home, however, will need to comply with one or more of the following municipal codes: zoning and land use permits, building permits, fire department codes, health permits, signage permits, noise control codes, and the like.
As for state licenses, there are many different types. The standard is a state business operating license, which grants you the right to operate within the state. Other state-level licenses you may need are seller’s licenses and occupational licenses, as well as any tax registrations.
Federal licenses, for the most part, are only required if you’re doing business in a federally regulated industry. Animal and plant products, for instance, will need approval from the United States Department of Agriculture. Media services would apply with The Federal Communications Commission. The list for federal licenses and agencies can be found here.
What You Need Before Applying for a License
Before applying for a business license or permit, you must first be a legal business entity.
Start by registering an available business name with your state or country clerk’s office. There are four ways to register a business name, each one with its own purpose and independent of the other. Depending on how you envision your business to grow, you may opt to apply for any combination of these:
- An entity name protects you at state level
- A trademark protects you at a federal level
- While “Doing Business As” (DBA) doesn’t give legal protection, it lets you conduct business as a different identity from your own personal name or your registered business entity. This is usually the easiest way to register a name, and the most common amongst sole proprietors.
- A domain name protects your business website address
Business name registration requires a small license fee, but will protect your business from someone else operating under the same name. It will also be required if you want to proceed with other business or permit applications or open a bank account under your business name.
The next step is to determine what type of structure you want for your business — sole proprietorship, partnership, corporation, or limited liability company.
The business structure determines the paperwork you need to file, the taxes you will pay, and most importantly, how much of your personal assets are at risk.
Sole Proprietorships
Sole proprietorships are the easiest to form and give the individual complete control of their business. (If you don’t register as another form of business, you’re automatically considered to be a sole proprietorship.)
While a good choice for new or low-risk businesses just testing out an idea, sole proprietorships may have a hard time raising money or expanding operations. They are not a separate business entity, which leaves the owner personally liable for all business debts and responsibilities.
Partnerships
Partnerships are the simplest structure for two or more people forming a business together. They are a good option for multiple owners, professional groups, or as a first step before registering as a corporation.
The two common partnership types are limited partnerships (LP) and limited liability partnerships (LLP).
LPs require one partner with unlimited liability, and the rest with limited liability (and oftentimes limited control). All profits are declared in the partner’s personal tax returns, while the partner with unlimited liability must also pay self-employment taxes.
LLPs give limited liability to every owner, which protects all partners from debts against the business or all other partners.
Corporations
Corporations (or C corps) are complete legal entities on their own. This means a corporation can make a profit, be taxed, and be held legally liable — completely separate from its owners.
Corporations offer the strongest protection (which is good for higher-risk businesses), can raise funds more easily, and continue operations through ownership changes. However, they are also the most expensive and complicated structure to form and are often subject to higher income tax rates.
There are many types of corporations. Benefit corporations (B corps), for instance, are operations that produce both a profit and a public benefit. S corporations (S corps) are those that can only have a maximum of 100 shareholders who must be U.S. citizens.
Nonprofit corporations are those founded for charity, education, religious, or scientific work. Because of their benefit to the public, nonprofits are often tax-exempt, yet also limited in how they can spend their profits. They are often referred to as a 501(c)(3) corporation, a reference to the IRS section that grants its tax-exempt status.
Limited Liability Companies
A limited liability company (LLC) blends the benefits of partnerships and corporations. Like a partnership, they incur lower taxes and less paperwork, and like a corporation, they protect owners from personal liability.
LLCs also have some limitations. For example, some states may require that an LLC be dissolved and re-formed whenever there’s a member change or transfer of shares.
Once you have a legally registered entity, the next step is to go to the IRS website for a tax identification number, also called an Employer Identification Number (EIN). This acts like a Social Security number for your business, and is required whenever you apply for any license or permit.
How to Apply for a Business License
Now you’re ready to get your business license. In addition to the basic license to operate, you may also need to apply for others specific to your business activity and business location.
To learn more, the Small Business Association and Board of Equalization websites are the best resources. Make sure you obtain all important information, including licensing requirements, license tax and fees, and expiration periods.
You can also go to your local city or state website and download all necessary application forms, or go straight to your local city hall to pick up the hard copies.
Business license applications generally require the following information: business name, business address and number, business structure, the type of business being conducted, EIN (or your Social Security number, if you are a sole proprietor), owner information, driver’s license number, total employee number, expected annual sales, and any other necessary permits.
After filling out all the required forms, you can file them online, through snail mail, or in person at your city’s relevant department.
Filing business license fees usually range from $50-$400 or more, depending on the business structure and location. For example, to register a corporation in California costs about $100, plus a $15 handling fee, while the same corporation in New York is $125 plus 0.05% tax for shares.
License processing times vary as well. They depend on the complexity of the business, the city and state, and the amount of other licenses being processed at the time.
Once you’ve been approved, you may need to pick up your license in person to verify your identity as the owner, as well as have your fingerprints documented for filing purposes.
Maintaining a Business License
As a licensed business owner, there are a few things to keep in mind. Most licenses and permits expire after a certain period of time and will need a business license renewal.
It’s also important to report any major changes in your business information, such as the hiring of new employees, introduction of new products or services, or opening of any new locations.
Make sure to read through all the documentation and be mindful of any requirements.
Now You’re Ready for Business
Congratulations, you’re one step closer to becoming a licensed business owner! While a licensed business does entail more paperwork and requirements, it does have its share of benefits, as well. You’re an official entity, with legal rights and protection, and now part of a community of like-minded entrepreneurs.
