Starting a business can be exciting, but it can also be complicated.
A great product and extensive knowledge of your primary market are just the first steps.
Acquiring a free business license to operate legally requires an entirely different set of preparation.
The good news is it’s relatively easy to get licenses and permits.
Local government agencies often provide specific guidelines for small business owners to assist them.
Let’s jump into the basics of how to obtain business licenses, know the different types of business licenses, and check what items you need to prepare before your business license application.
- What is a Business License?
- 6 Types of Business Licenses and Permits
- Things to Prepare When Getting a Business License
- How to Get a Business License for Small Businesses this 2023
- Business License Cost By State
- Common Mistakes to Avoid When Applying for Business Licenses
- Mistake 1: Not Checking Local Zoning Policies Before Signing a Lease
- Mistake 2: Submitting Incomplete Owner Biographical Information
- Mistake 3: Not Preparing Current Financial Statements or Report
- Mistake 4: Implementing Changes to a Business Without Updating the License
- Mistake 5: Choosing the Incorrect Business Entity
- Frequently Asked Questions
- Wrapping Up
What is a Business License?
A business license refers to all permits required by law before businesses can operate in an area.
This can be issued by federal, state, and local governments, depending on the nature of your enterprise and business location.
In some cases, a business entity might be required to secure multiple licenses for legal state regulations purposes.
6 Types of Business Licenses and Permits
There are six major types of business licenses fit for different ventures.
Depending on the scale and area of operation, you may be required by your state or county to provide one or more of the following licenses.
1. Federal Business Licenses
Most ventures, especially small businesses, don’t need this.
These are often required from companies with large-scale operations whose products are regulated by the federal government.
Examples are companies producing tobacco and medical devices.
Big industries that may require this include transportation, agriculture, cargo, and broadcasting.
2. State Business Licenses
People often refer to this type when they talk about a general business license.
Compared to federal permits, this one is mandated by most states.
It also covers different industries regardless of size.
Each state provides online resources on how to get this license, along with the required forms and fees to register.
3. Local Business Licenses
A city or county reserves the right to require more permits on top of the state business license.
This is often due to varying laws implemented in a locality.
The food and alcohol industries often require this.
Different types of local licenses include building, signage, health, and zoning permits.
4. Professional Licenses
This is otherwise known as an industry license and is required for businesses with services requiring specialized knowledge.
Professionals, such as accountants, doctors, real estate agents, nurses, hair stylists, and more must get this from their state’s licensing board.
This one is the longest to acquire as it often needs a combination of a degree or certification, a standard exam, and work experience.
5. Sales Tax Licenses
A sales tax permit or seller’s permit is required for any venture selling goods in person or through an online business.
This permit allows you to collect tax from those items you sell.
Note that the license must be renewed as long as the business plans to operate.
6. Home-Based Business Licenses
While this has been available for years, it became more relevant during the onset of the COVID-19 pandemic, when many existing and new entrepreneurs went full-on remote.
Cities require this for home-based operations to ensure your business doesn’t disrupt local traffic or cause environmental issues.
You can ask your local office for assistance during processing.
Things to Prepare When Getting a Business License
As you work on consolidating what you must submit to get a business license, contacting local-level authorities is essential to confirm the correct processing sequence, documents, and fee.
For state and most special permits, the following items are required:
- Owner profile and contact information
- Business profile and contact information
- Employer identification number from the IRS website
- Required permits
- Required forms
- Upfront business license cost
How to Get a Business License for Small Businesses this 2023
Different state jurisdictions can vary in processes, but there are general steps involved in applying for a business license that a small business owner and sole proprietor can use for their growing ventures.
Establish Your Business Entity
This refers to your business structure.
Are you running it solo, or do you have a partner?
What about your personal assets?
Do you wish to protect it against any business liabilities?
Every business operates differently based on its structure, and you must give this complete profile when you apply for licenses.
A popular business structure is the limited liability company (LLC), which is attractive for startups whose owners want to protect their personal assets against potential debts and lawsuits.
The major downside lies in its tax implications.
Since LLCs are treated as partnerships, owners are taxed based on the business income even if they don’t receive actual cash from its profits.
Other types of business structures include corporations, non-profit organizations, general partnerships, and sole proprietorships.
Make sure to provide specifics on this area when creating your business plan.
Get Your Employer’s Tax Identification Number
For small business owners who don’t have any employees, their social security numbers will suffice.
Other than that, licensing requires you to get a federal employer identification number.
The process is straightforward.
You just need to visit the IRS website and follow the prompts to get your number.
Identify All the Licenses and Permits You Need to Prepare
Granted that you’ve identified all the specifics about your business, it’s easy to tap the federal agency or department that handles all the licensing across industries.
You can start by checking your local small business administration office.
Most of them offer online resources to assist you in gathering all the license requirements.
Contacting your Secretary of State’s office can be a good start for bigger businesses.
They’re well-equipped to provide information on regulatory standards, including the documents you must present for compliance.
If still in doubt, you can tap a business lawyer who’ll do all the legwork, from consolidating all documents up to the application and approval of your business license.
Submit the Business License Requirements to the Appropriate Department
If you plan to get multiple licenses, you’ll likely deal with more than one U.S. department.
Learn the correct sequence by calling the relevant county or state officers before sending the requirements.
Once you’ve received your business license, you must confirm how long its validity is and how much the renewal will cost.
Many permits require annual renewal, but some don’t expire as long as the business remains operational.
Business License Cost By State
Licensing costs vary across different states, but the average fees range from $50 to $500, including processing and filing.
As of the time of writing, few states don’t advertise a fixed starting cost for licensing.
When filing, you must visit your state’s official website, the Division of Revenue, or other relevant entities involved in the licensing process.
To give you an idea, though, here are some ballpark business license costs we have for some states:
- Alabama – $300+ for annual license
- Alaska – $50 to $100
- Arizona – $0 to $50 (transaction privilege tax license)
- Arkansas – $25 to $100+ (annual franchise tax license)
- California – $50 to $100+ (business tax certificate & license)
- Colorado – starts at $25
- Connecticut – $50 to $250+ (initial filing fee)
- Delaware – $89 to $250+
- Hawaii – $25 to $50
- Illinois – free business license by state but has application fees for a specific locality
- Idaho – $20+
- Maryland – $0 to $50+
- Minnesota – starts at $15
- Nevada – $200 – $500
- New Jersey – starts at $150
- New Mexico – starts at $50
- New York – $100 to $200
- Ohio – starts at $25
- South Dakota – $0 but has fees for state sales and use tax license
- Tennessee – starts at $15
- Texas – $0
- Utah – $5 + 0.05 per record (business registration)
- Washington – starts at $90 (online business registration)
- Wisconsin – $100 – $130 (business registration)
- Wyoming – starts at $100
States not mentioned on the list don’t advertise licensing cost estimates, so business owners in these areas must check the state’s website or call local agencies for assistance.
Remember that the costs we’ve listed don’t determine the full fee details.
Most states have add-on fees depending on the county, so checking with your local agencies is still recommended.
Common Mistakes to Avoid When Applying for Business Licenses
It’s easy to get carried away with all the excitement of starting a small business that entrepreneurs forget to cover some basics.
More often than not, this results in more expenses and wasted time.
To avoid that, here’s a list of mistakes you should avoid when getting a business license.
Mistake 1: Not Checking Local Zoning Policies Before Signing a Lease
Finding an excellent location for business is a must, but so is ensuring you can establish a shop in that area.
You’d be surprised to know that several businesses sign a lease to a location only to be alerted by the local government later that the place is off-limits.
Mistake 2: Submitting Incomplete Owner Biographical Information
Background screening for company owners is part of most federal and state licensing procedures.
A common mistake by first-time applicants is skimming through the items in a biographical affidavit and leaving out those they think are unnecessary or not putting ‘N/A’ to things that don’t apply.
Mistake 3: Not Preparing Current Financial Statements or Report
Financial statements prove your capability to sustain your business’s need for money.
A common mistake is preparing reports that are not up-to-date or don’t satisfy the required reporting period by the state.
When this happens, the reviewing body will likely request the correct documents, which can take time, depending on the nature of your financials.
Mistake 4: Implementing Changes to a Business Without Updating the License
For existing businesses who want to expand, updating their license details to operate is mandatory.
Yet, several companies forget or choose not to comply with this.
Updates don’t only involve changes in location, business name, or contact details but also the size and business entity type.
Companies that merge or acquire smaller ones must document the change to remain compliant with tax and regulations policies within the specific jurisdiction.
Mistake 5: Choosing the Incorrect Business Entity
Just because a limited liability company sounds fit for your business name doesn’t mean it’s the correct structure.
The same goes for all types of entities.
Remember that structures impact the kind of license requirements you have to consolidate.
Choosing the wrong one wastes time and may even cost you more.
Frequently Asked Questions
Who Needs a Business License?
Any business activity will require licenses and permits.
What sets the difference is the kind of industry your venture belongs to.
Regulated businesses such as food and beverage will require more permits than freelance side hustles.
How Much Does it Cost to Get a Business License in the U.S.?
This depends on your state of operation, industry, and required license type.
For instance, a business license in Delaware can start at $89 per year, while in Nevada can range from $200 to $500.
It’s always recommended to check your local tax or state authorities for a complete rundown of business license fees before processing all the necessary licenses.
How Long Does it Take to Get a Business License?
Provided you submitted all the required documents, the processing can take as fast as one day or last for a few months.
Federal licenses often take longer since the license issuer needs to do a more extensive examination of your business activities, which may require coordinating with another government department.
What Happens if I Don’t Apply for a General Business License?
The consequences can vary per state.
It can range from business suspension until you comply, penalties with interest, lawsuits, and business closure.
Note that some areas don’t have statewide license requirements, like South Dakota.
However, the local-level government requires all businesses to apply for other licenses like the Use Tax license.
Wrapping Up
Securing all relevant license requirements is a crucial part of starting a business.
Whether you’re a small business or a large-scale enterprise, getting all the legal permits is necessary to ensure you don’t get in trouble with the law.
Use our guide to get an idea of what licenses your type of business needs, and call your local government to get a full list of the requirements.
