Understanding Business Licenses

If you’re starting your own company, be sure to avoid the common mistake of overlooking the licenses and permits you need to run your business. Nearly all businesses require some form of federal, state or local business licenses. You don’t want to start your business off on the wrong foot by failing to obtain your licenses before transacting business.

Federal, state and local licenses

Federal licenses are typically required only for businesses regulated by a federal agency, such as the Securities and Exchange Commission and the Bureau of Alcohol, Tobacco and Firearms. But there are many different types of state licenses, generally granted by state agencies or the state department of taxation.  Most local counties and municipalities require licenses, too. Here are some examples:

  • Many occupations require a specific amount of certified education and/or training, including doctors, lawyers, accountants, barbers, real estate agents, etc. and therefore require licenses.
  • Many states have licensing requirements for bars and restaurants.
  • Most retail businesses need a sales tax license.
  • On the local (city and/or county) level, most businesses need a general business license to operate in a particular city or county. There are often local tax-related licenses, too.

Permit types

There are a plethora of permit types, according to your business location and type. They act as evidence that you are in compliance with local ordinances that govern things such as the appearance of the community and safety to consumers. Here are some examples:

  • Health department permits are needed for businesses involved with food preparation.
  • Sign permits are used to govern the appearance and/or location of business signs.
  • Fire department permits are used to govern the public safety of your business location.

Zoning requirements

If you operate a home-based business, be sure to check on zoning requirements. Some cities prohibit certain business activities in residential areas. If this is the case for your location, you may be able to petition for a variance, which is an exception, to operate from your home. Check with your city or county zoning office on the zoning ordinances for your neighborhood.

Other considerations

There are a few other items, which are not business licenses per se, but are often required:

  • A federal tax identification number. Also called an employer identification number or EIN, this acts as a social security number for your business. It is issued by the IRS and required on all federal tax returns filed for your business and is a requirement for payroll tax filings.
  • A state tax identification number. Certain states require businesses to have this in addition to the EIN.
  • Doing business as (DBA) filing. This allows a business to operate under a name other than the “official” name. Corporations, limited liability companies (LLCs) and other state-formed business entities can file DBAs to do business using a name other than the one included on their state formation documents. Sole proprietors will need a DBA as well if they are doing business under a name different from that of the owner.

Determining your license needs

To learn which business licenses may be necessary for your particular business, contact the appropriate state and local agencies to determine your requirements and application procedures. There are also services that can research license requirements for you and provide the necessary forms and application instructions.

As a new business owner, complying with all the laws and ordinances governing your type of business and location will get you on a smart path to success.