Neglecting Business License Requirements Can Be Costly
If you operate a business, it is almost certain that you will need one or more business licenses. If tax rules are the alligators in the business compliance and record-keeping swamp, then business license requirements are mosquitoes: annoying, hard to eliminate and potentially dangerous if they bite you.
Obtaining Licenses: Be Ready for Opening Day
Whether your dream is to open a gift shop or a doggy day care center, you need to research the licensing requirements in your area. Certain types of businesses, such as restaurants, and certain professions, such as tattoo artists, are more highly regulated—which means more licenses must be obtained.
Business licenses, also known as business permits or privilege licenses, are usually creatures of state and local governments. Therefore, in order to ensure that you are in compliance you need to start at the state level and work your way down to the city in which you do business.
Although only a few highly regulated industries (firearms, telecommunications) require a federal license, any business (other than one run by a sole proprietor with no employees) must have a federal Employer Identification Number. Our article, "Obtaining Your Business Identification Number" provides information on how to obtain your EIN if you do not have one.
Most states require a state license for a wide variety of businesses that operate within their borders. Some states, such as Delaware, require virtually every entity that does business in the state to have a business license; whereas others require state-level licenses only for specific types of businesses or occupations.
To research what requirements are needed for your state, one place to begin is by conducting an Internet search for the words "business license" followed by the name of the state in which you are going to be doing business. Many states also publish a guide to doing business in that state. If such a guide exists for your state, make sure to obtain the most recent copy. You can also take advantage of the BizFilings' Business License Wizard to quickly get an overview of your license needs.
If you are selling taxable items or providing taxable services, you will need to obtain a vendor's license from your state department of revenue, unless you are in one of the few states that does not impose a sales tax. The Sales Tax section of the BizFilings Business Owner's Toolkit contains several articles to get you up to speed on your sales tax obligations.
Even if your state does not require any type of license or permit for your type of business, you still need to navigate through murky backwaters of local licensing requirements. Local governments may require permits for a wide variety of reasons—ranging from protecting the public to generating revenue. Among the many types of local permits required by most localities:
- Local business licenses or tax permits (city/county clerk or department of revenue)
- Building permits (city/county building and planning department)
- Health permits (city/county health department)
- Occupational permit (city/county building and planning department)
- Sign permit (city/county building or zoning department)
- Zoning permits (city/county building or zoning department)
- Home-based business permits (city/county zoning department or city/county clerk)
One of the biggest nuisances regarding licenses is dealing with the local bureaucracy to determine what licenses are required and what forms must be completed. For this reason, many businesses elect to pay someone else to do the legwork for them. BizFilings offers a range of license services, as do a number of companies.
Make sure that you keep a copy of all of your license applications, along with a receipt showing payment of any fees, with your business records. In addition, know which licenses must be displayed and follow those rules.
Maintaining Licenses: Don't Fall Out of Compliance
Staying in compliance requires that you pay attention to two factors: renewal requirements and changed information related to your business. The following two best practices will help you remain in good standing with the licensing agencies:
- Keep a master list of all renewal dates. In addition, set up a tickler system that reminds you of a pending renewal well in advance of the deadline. (If you are a snooze alarm type of person, set several reminders.)
- Add "update business licenses" to your to-do list when you make any change regarding your entity or your business operations. For example, if you change your business name or incorporate your sole proprietorship, you will need to update your licenses accordingly. Or, if you expand your business--whether it is by remodeling your building, opening a second location or even launching a new product or service line, you must check to ensure you have the necessary licenses.
Failing to have your business licenses up to date can result in hefty fines and penalties. Some violations even carry criminal penalties; and some can be imposed on the owners of a business, not just on the business itself. Government agencies also may have the right to shut down your business (or even seize your assets) for failure to comply.
The Oklahoma Alcoholic Beverage Laws Enforcement Commission recently seized all the equipment and supplies that a restaurant used to create its signature craft beers because the restaurant had failed to obtain the necessary licenses. And, in New York city a popular wine store had to temporarily close because the renewal process took longer than anticipated.
Not only will a shutdown cost you in lost revenue for the days you are shuttered, you may also lose the goodwill of your customers and damage the reputation of your business.
Therefore, take the time to make sure you have obtained all the necessary permits; they are all still current; and the information submitted is still accurate. Investing a few hours now may save you a great deal of time and trouble later.