By Caron Beesley Published: February 01, 2012
Starting a business? Confused about whether you need a business license or permit?
Virtually every business needs some form of license or permit to operate legally. However, knowing which one you need, however, can be a little tricky. It depends on the type of business you are operating, where it’s located, and what government rules apply.
The problem is that many businesses overlook this basic requirement of starting a business often because they simply aren’t aware of what the law requires. This can lead to costly penalties, tax problems, and even the closure of your operation. The good news is that getting the right license or permit isn’t difficult and doesn’t cost much.
Here’s a quick overview of the process of obtaining a license or permit for your new business.
Why Do Businesses Need Licenses and Permits?
One of the biggest reasons business owners need licenses is so the government can track revenue for taxation purposes. However, licenses and permits are also used to protect the public.
For example, if you are engaged in a federally regulated industry such as aviation, alcohol, or agriculture, you will need to obtain specific federal licenses or permits.
Other licenses, known as professional licenses, signify the level of expertise that an employee or business owner has- dentists, hair dressers, veterinarians, and doctors must have professional licenses.
If you are selling goods or services, you may need to get a sales tax license or permit .
Even home-based businesses and sole proprietors typically need a permit from their local government to operate legally.
Finding the Right Licenses and Permits
Because every business has different licensing and permit requirements depending on its location and industry, it can be intimidating to know where to start.
To help business owners navigate the process, SBA.gov offers links to state-specific license and permit information.
What About Tax Permits?
While the IRS doesn't license your business, it does
require that certain businesses register to receive a federal tax identification number (this link helps you determine whether your need an EIN or not). You’ll also need to register with state and local government agencies for applicable tax permits such as a sales tax license, income tax withholding, and unemployment insurance tax. The Permit Me tool can point you to your local state revenue office.
What about Home-Based Businesses?
Home-based businesses are often the most susceptible to permit violations. Why? Often, sole proprietors, consultants, or other home businesses aren’t aware they need a permit to operate out of their own home.
So what do you need? At a basic level, your state or local government may require that you hold a Home Occupation Permit . If you are a consultant or freelancer, this may be all you need. However, if you operate a business that involves or directly impacts the public, such as an in-home childcare facility or at-home food production business, you will need an additional permit or license according to your type of business.
Read Licensing Requirements for Home Based Businesses for more guidance on what you need to legally operate out of your home.
If you live in a community managed by a home owner's association (HOA), it's a good idea to check whether it can restrict your business activities. Read Can a Homeowners' Association Ban Your Home-Based Business?
Managing and Maintaining Your License or Permit
Once you have your license or permit, you’ll need to manage and maintain it. SBA.gov has the following advice:
- Keep track of renewal dates.
- Maintain a copy of all licensing applications and forms in your business records.
- Display your licenses or permits correctly. Most states and localities require businesses to prominently display their business licenses so customers can see them.
- If you expand your business, whether it’s expanding your building or launching a new product or service, you may need additional business licenses.
Category: Personal Finance