If you are planning on starting your own business, chances are that you will need some type of license or permit - maybe more than one - to move forward legally. A business license is a permit issued by a government agency that allows business to be conducted in said government's geographic jurisdiction. By and large, your state or local government will determine which licenses and permits are required to operate in its jurisdiction. Additionally, the federal government requires special licenses for certain industries.
Why Is a Business License Required?
Obtaining a business license is necessary for three main reasons:
- So the government can track taxable revenue
- So consumers are protected in federally regulated industries
- So that you may demonstrate your level of professional expertise
Determining the requirements for your business is the first and most important step.
Identifying License and Permit Requirements
Business licensing requirements are determined by:
- Business activity
- Physical location
The U.S. Small Business Administration provides a great resource for determining the licensing requirements in your area. After entering in your local zip code and the type of business you are starting, you are presented with a list of the permits and licenses you will need along with the locations at which you can find the requisite forms.
Before you can apply for a license, you will need to determine your business activity code, which is based on the North American Industry Classification System (NAICS). In order to select the proper code, you must determine the activities from which your business will derive the largest percentage of its total receipts, which is defined as the sum of gross receipts or sales plus all other income.
The Internal Revenue Service requires businesses to register to receive a Federal Tax Identification number, also known as an Employer Identification Number (EIN). Your business will need an EIN if you can answer yes to any of the following questions:
- Do (or will) you have employees?
- Do (or will) you operate your business as a corporation or a partnership?
- Do (or will) you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
- Do (or will) you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do (or will) you have a Keogh plan?
- Are (or will you be) you involved with any of the following types of organizations?
Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
Real estate mortgage investment conduits
Licenses and Permits
If your business will fall under the regulating eye of a federal agency, you will need to obtain the corresponding federal license or permit. Examples of business activities that may require such licenses include:
- Alcoholic beverages
- Firearms, ammunition and explosives,
- Fish and wildlife,
- Mining and drilling
- Nuclear energy
- Radio and Television broadcasting
- Transportation and logistics
Permits can usually be found online, on the website of the entity that regulates the specific regulated activity the business will engage in. For example, if your business is involved in agricultural activities, you can find the necessary applications at the website for the U.S. Department of Agriculture. If you plan to broadcast your own television or radio program, you can find the necessary application online via the Federal Communications Commission.
It will also be necessary for you to register for applicable tax permits with state and local agencies. For instance, if your business will be selling goods or services, and you are operating in a state which levies an income tax, you will be obligated to obtain a tax license so that the state can track your taxable revenue. Contact the license commissioner in your county or municipality and the office of your state's Secretary of State to find out the exact requirements that apply to you.
Even sole proprietorships run out of someone's home are required to obtain business licenses in some areas. These can include:
- General business licenses
- Trade licenses (such as a license to operate a child care service or sell real estate)
- Sales tax permits
- Health and safety permits
- Sign permits
- Zoning permits
Filling Out and Filing the Forms
Once you figure out the licenses and permits you need to legally register your business, you will then need to fill out the necessary forms. These can be obtained from the appropriate federal or state agencies, and they usually can be found online. You may print the forms, fill them out, and mail them back to the agency; however, in many instances you will be able to fill out the forms and submit them online. Regardless, information you can expect to disclose may include, but not be limited to, the following:
- Type of business
- Business address
- Name of business owner
- Contact information
- Federal ID number
- NAICS code
- Number of employees
Expect to pay a filing fee, which can range from around $50 to hundreds of dollars or more, dependent upon the region you are filing in and the types of activities your business will be conducting. Fees are often calculated as a percentage of revenue, with a base minimum for new companies. The time it takes to receive your license can vary from a few days to a few weeks.
Obtaining the necessary licenses and permits for your business is required in order to operate legally. Moreover, the task is not a one-time occurrence. Most licenses and permits will need to be renewed periodically. For example, if you are running a restaurant with a bar, you will need to renew your liquor license once a year.
While this process can seem daunting, being familiar with the steps will go a long way in making the experience as painless as possible.