How to Apply for a Business License
Every year in the United States, over 627,000 new businesses are started. These can range from sole proprietors operating their own small business to corporations. While each business is unique, most will have to apply for at least one license in order to operate in accordance with the law. These licenses can be at the federal level, state level, or local to county and city limits.
If you are starting a business, it is important to understand which licenses you need and keep them updated throughout the course of your business. Failure to do so could result in fines or even having your workplace shut down. Read on to understand the basics of applying for business licenses.
What is a business license?
A business license is any formal license or permit that is issued by a governmental entity as a requirement to operate a business. These can be issued by the federal government for certain regulated industries, but most are done at the state or local level.
Some states require a general business license that applies to all industries and types of businesses, while others do not. In all cases, industry-specific licenses are generally required depending upon the type of business you run.
It is important to note that a business license is different from any professional licenses you may hold. For example, in order to practice as a doctor, you must obtain professional certification that allows you to do so. But in order to open your own practice, a separate license must be obtained for the business.
Who needs federal business licenses?
If your business activities are regulated by a federal agency, you need a federal license in place before you conduct any business. These are issued on top of local licenses, not in place of them. Each issuing agency may have different fees associated with the license.
Businesses that require a federal business license include:
- Import or transport of animals products, biologics, biotechnology, or plants across state lines
- Manufacture, wholesale, import, or sale of alcoholic beverages at a retail location
- Operating aircrafts, transporting people or goods via air, or performing aircraft maintenance
- Manufacture, dealing, or import of firearms, ammunition, and explosives
- Wildlife related activity, such as the import or export of wildlife and derivative products
- Commercial fishing
- Ocean transportation or facilitation of the shipment of cargo by sea
- Drilling for natural gas, oil, or other mineral resources on federal lands
- Producing commercial nuclear energy, fuel cycle facilities, and distribution or disposal of nuclear materials
- Broadcasting information by radio, television, wire, satellite, or cable
- Operating oversize or overweight vehicles
Each of these business types will need to report to the correct federal agency in order to procure their licensing.
How to find out which state, county, and city licenses are needed
The types of business licenses required to legally operate can depend heavily on your business location and your line of work. It is important to understand what licenses are needed in your state, city, and county. Municipal codes will dictate licenses at the local level.
You may be able to find information on the correct license online, by visiting your state’s Department of Revenue online and looking for online applications and information. The same process will apply to local governments, though with these smaller entities you can often call and speak to someone who will properly guide you through the business license application.
Be sure to ask about the renewal period for each license, as some may require frequent upkeep while others will last for years.
If you are running a business online, the business is still considered to reside in the state where you base the business.
Why are business licenses required?
Business licenses are in place to ensure that every business operating is safe for the public and meets local standards. These licenses ensure there are standards in place, like a restaurant being clean or a hospital having proper evacuation routes, that can be upheld by a government entity.
Each entity that issues a license has knowledge of how these industries work and can use this to enforce these standards.
Business licenses are also used to register your startup with the government for business tax purposes or to ensure you follow all regulations in the industry.
What is the process to obtain a business license?
Form your business entity
Your business license will be associated with the business name, so it is best to go through the process of creating and registering your business before seeking out licenses. This will prevent the need to reapply or amend your license at a later time. All business structures can require licensing, so choose the one that best fits your needs and follow your state’s process to formalize the entity.
Apply for an Employee Identification Number
Many states require you to include a federal tax ID number as a part of your application for any business license. An EIN, or employer identification number, acts as this ID. If you are running a sole proprietorship, you can choose to use your personal Social Security Number instead of applying for this. EINs can be obtained through the IRS website and you will obtain the number immediately.
Determine the licenses you need
You need to determine what licenses are appropriate at all levels of government, from federal to local. The best resources for this will be your state’s Department or Revenue or Secretary of State’s website, or the Small Business Administration office in your area.
Many people choose to work with a business lawyer during this process to ensure they are in compliance with all laws.
Apply for your business license
Most states and many localities issue general business licenses online through the agency’s website, though industry-specific licenses may have a more complex process. A business operating licenses and sales tax permit are generally issued quickly, while others may have extensive review processes.
Because you may have to file a large number of applications, some U.S. Small Business Administration offices resources to gather all your information into one place to avoid duplicative work. A local business development center or online business center might be able to help too.
Renew your business licenses
Pay attention to the terms of all licenses you obtain to be sure you know how often you must reapply or pay a fee to keep them current. Some will have an annual cadence, while others could last for years.
Quick tips to get the right licenses
- Always check the federal, state, city, county, and any other municipality guidelines to ensure you have all the right licenses in place.
- Check with the city council on local zoning regulations to ensure you are in the right location and don’t need additional permits.
- Work with a business lawyer to ensure you are in compliance with all governmental regulations.
- Consider whether you will do business across state lines as this may dictate the federal licenses you need.
- Before doing business, set up a renewal schedule to stay in compliance.
How much does a business license cost?
Business license fees will vary based on the type of license and the state or locality you are in. It is common to see fees in the range of $50 to $200 for a general business license, with similar annual renewal rates. Federal licenses are usually more expensive than state and local licenses.
Do online business owners need a license?
Each business is regulated by the laws of the state and locality where it is physically located, even if all activity occurs online.
You have to follow all the relevant rules as if you were opening a business at your physical address, including seller’s permits and sales tax licenses where applicable. This also applies when you are operating an e-commerce business such as selling on Amazon and eBay.
Is a state license the same as an LLC?
No. An LLC is one kind of business structure that determines how it is treated for legal and tax purposes.
A business license is a permit that allows the business to operate and to perform certain services in a certain location. Even a sole proprietorship, which is not registered with the state, can require a license.
Is a business license always required?
Each state and locality will have different rules surrounding licenses. Some states do not require a general business license, but towns and counties may have other business license requirements.
Even when a state or locality does not require a license, you should check whether you are obligated to obtain a federal license depending on your industry.
Does a freelancer need a business license?
Whether an independent freelancer needs a business license depends on the exact services provided.
For example, graphic designers most likely do not need to have a license as long as they operate under their own name, but specialized trades like cosmetology can require licensing. It’s always best to check with government agencies.
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