Starting a new business is an exciting endeavor, but it can also be a complicated process that includes acquiring several documents. One of the documents your new business might need is a business license.
If you have discovered that you are operating a type of business that requires a license, read on to learn the steps and costs associated with acquiring a business license.
What is a business license?
A business license is a legal document issued by a government entity that permits your business to operate. Most small businesses are legally required to obtain a business license prior to startup.
Business licenses serve a couple of different purposes. In many counties, they prove that your business is operating in a manner that is safe for workers and buyers.
While the prospect of getting a business license may seem daunting, many business owners report that the process is worth it in the end. Not only does a business license give customers confidence in your operation, but it also can provide a small amount of legal protection.
Many counties have penalties for not acquiring a business license if one is required. Therefore it is essential that you take the time to ensure you have every type of business license required to operate your business before you begin.
Also, keep in mind that some businesses will require more than one type of business license, especially if you are handling food, alcoholic beverages, or restricted substances.
How do you know if you need a business license?
The only way to know if your business needs a license or not is to check all of the laws in your area. This includes looking at state, city, and county laws.
In general, unless you live in a select few counties, all businesses, even a nonprofit, require a license to operate. There are many different types of licenses businesses require, and usually, the basic one in your state is required for all businesses, even if you are operating a sole proprietorship from your home.
Those operating a business outside of their home will likely need additional permits, and those offering a professional service may need to have professional licenses proving they are licensed to provide said services. Examples include massage therapists, cosmetologists, and body waxers.
How to check if your business needs a license
- Federal – The best place to start is by heading to U.S. Small Business Association website to see the licensing requirements of the federal government.
- State – If your business doesn’t require a federal business license, the next step is to check the regulatory body for your state. This can be done by going to the website of the Secretary of State for your state. They often oversee small businesses.
- City/county – After you have sorted whether or not you need a license in your state, the next step is to check with your county and city to see if they require specific business licenses. Sometimes in large metropolitan areas this information is available on the Secretary of State website, otherwise look for a government website (ending in .gov) for your city and county and see if there is a business section for entrepreneurs.
As you can see, it is not easy to know exactly what business licenses your businesses will need. In order to be sure you are operating your new business legally, it is advised to seek legal counsel. A business lawyer can help you navigate all of the difficulties involved in licensing a business.
Check out our guide on How to Start a Business
Types of business licenses
The types and necessity of business licenses vary widely from state to state and from county to county, making it difficult to know exactly what licenses you need. Below are the most common types of business licenses required.
Business operating licenses
A basic business operating license is a permit that is issued at both the state and city level, which gives your business permission to operate in your city. You may need to apply for a state business license separately from a city one, but in some states, you just need the one at the state level.
DBA or doing business as a license
A DBA or doing business as the license is a permit that gives entrepreneurs the ability to operate under a name that is different from their own. This name can be a business name you choose, but you may need to check a copyright database at the national and state level before choosing to ensure your name is available.
Some states require a DBA license but call it something else–such as a trade name, fictitious name, or assumed name. It is also important to know that not all states require a DBA license.
Planning and zoning permits
Each county and city will have specific regulations on where businesses can operate. Many areas of cities are zoned for specific types of businesses, and you usually must apply for a zoning permit to ensure the area where your business will operate is the correct area for your type of business.
If the area where you want to operate your business isn’t zoned for it, there is a possibility to apply for a zoning variance permit. A zoning variance permit may require you to prove that your business won’t disrupt the community by operating in an area it is not zoned for.
When you shop for a spot to operate your local business, you will often see words like “commercial/restaurant,” “industrial,” or “residential.” These words often correspond to the zoning ordinances, so take note and ensure you are choosing a location zoned for your business.
Building occupation permits
A building occupation permit is required in many locations to certify that the building your business operates in is up to code. Most types of business insurance require a building or operation permit before issuing a policy.
Building permits are issued at the local level by government agencies that will check the property for structural safety, as well as fire and flood risk.
If you are operating a business in your home, then a home occupation license will establish the same thing as a building occupation permit but know that these permits can be difficult to obtain depending on the layout of your home and neighborhood.
Fire department permits
In addition to the occupational permit, many cities require your business building to be evaluated by your local fire department and its fire risk taken into account.
In order to receive a fire department permit, you will have to disclose anything flammable you sell or use, as well as establish a fire safety plan and fire exits. The exact process of what is needed varies from city to city.
In some locations, fire department permits are required to be updated regularly, so you will want to check your local regulations to know how often you need to schedule a walk-through to keep your permit up to date.
In some cities and states you are required to have a separate business-specific license for the collection of state taxes called a sales tax license. You may also be required to get an EIN or employer identification number from the IRS for federal tax purposes and to pay business tax.
You’ll need to check the local regulations in your area to see which of these your business is required to have.
Health licenses and permits
Companies that are operating in the healthcare industry, or serving foods and beverages will likely require a health license or permit of some sort. This permit will verify that your company has met all the health code standards for your area.
You may also have to comply with OSHA regulations and be subject to regular visits from the health department.
Companies dealing with chemicals, waste, or the outdoors likely will need to acquire an environmental license. Environmental licenses are given once your company and its effect on the environment are evaluated.
While you might be quick to brush off the thought of an environmental license, know that any company producing water waste or waste of any sort is likely to need one. For example, if you own a car wash in California, you need an environmental license establishing that you dispose of runoff water from the cars properly.
If you intend to hang a sign on your business, it’s important to check if there are sign permits required in your area. Many counties have restrictions on how large, bright, and tall signs for businesses can be.
Even if your county doesn’t require a sign permit, it’s a good idea to double-check before purchasing a sign that might not be up to code.
Some industries, such as gaming and construction, require additional licenses before operations can begin. Take a moment to check and ensure that there are no additional licenses required for your industry before beginning business activity.
What’s the cost of a business license?
The cost of a business license can vary widely from state to state, and some industries will require more licenses, making the total cost more expensive.
However, in most states, a general business operating license will cost between $50-$300, and some states require renewal each year. Nevada is the state with the most expensive licenses, and they cost $500 or more no matter what type of business you have.
It is advised to estimate high for your permit costs in your business budget, and if you end up spending less, consider it a bonus.
For licenses beyond the basic business license, such as building permits and zoning permits, it is a good idea to set aside a few thousand dollars for all of them until you know the actual cost. While many cost less than $100, it is better to be prepared than caught unaware.
How do you acquire a business license?
You have a few different options for acquiring your business license. They are as follows:
- File on your own.
- Contact an attorney to file on your behalf.
- Use a third-party company that specializes in attaining business licenses.
The option you choose is entirely up to you. Below are the steps for filing for a business license on your own.
1. Make a list of all the business licenses you need
Take a few hours and research every business license your business will need. If you have questions, it is important to ask someone who can help before you waste your money on a license that isn’t necessary for your business or apply for the wrong license.
This is also the time to file documents to create an LLC (limited liability company) or sole proprietorship, or any other business structure you plan to operate your business under. It is important to have all of these documents filed before you begin requesting licenses.
Once you have your incorporation documents, you can use these to open a business bank account, which you may need to pay licensing fees.
2. Find the business license applications
Once you know what licenses you need, start on the website for the Secretary of State for the state of your business. They will often have the paperwork for the general business license as well as the paperwork for some other licenses you may require.
You should also take this time to request an EIN for your business, as most business permits require it.
3. Fill out the documents carefully
Don’t rush through the documents. Take the time to ensure you fill out everything correctly and to the best of your ability. If you have the option, ask a friend or family member to read over your documents to ensure you have filled out everything completely.
You will need a lot of information about your business in order to fill out the forms completely. While what exactly you will be asked for varies from state to state, you should plan to have the following information about your business readily available.
- A description of your business
- Proof of tax status of your business (EIN and a local sales tax permit)
- Copies of any business documents (like the articles of incorporation or corporate bylaws).
- List of business owners and their stake in the company (i.e. partnerships etc)
- Information for the designated registered agent
4. Submit your documents and pay the filing fee
Once you are sure your documents are fully filled out, submit them to your Secretary of State, or any other entity you are directed to submit them to. Sometimes business forms, such as those for the tax licenses, may need to be submitted to the Chamber of Commerce or Department of Revenue for your state.
All of this information should be on the Secretary of State website for your state. The only exception to this is the EIN which must be requested directly from the IRS.
Whether you have to submit online, by fax, or by mail, pay attention to the instructions. Occasionally follow-up documents may need to be submitted within a certain time frame for a business license to be approved. Whenever possible, provide complete contact information so an agent can contact you if anything needs to be clarified.
Don’t forget to send the filing fee with your documents!
5. Wait for approval
Sometimes business licenses are approved immediately; other times they take weeks or even months to be approved. Keep an eye on the method of communication you provided to your Secretary of State for the response or a request for additional information.
It is never recommended to wait to license your business because of the amount of time it can take to obtain a license. It is best practice to apply for a business license the minute the business is incorporated and before you begin seeking out clients.
6. Make note of renewal requirements
One day, your business license will, hopefully, arrive. When this happens, make a note of when the license needs to be renewed to ensure you don’t let it lapse.
It is a good idea to put the renewal reminder in your calendar as soon as the license arrives so you won’t have to worry about forgetting later.
What happens if you don’t get a license?
Getting a business license isn’t always easy, and it takes a lot of work, but it is absolutely critical that all required licenses are acquired before you begin business activities.
If you don’t get all of the required licenses and it is discovered that your business is in operation illegally, you could be fined hundreds or thousands of dollars. Not only that but businesses can also be shut down for not having the proper licenses, ending your dream of owning a business prematurely.
Even if your business isn’t shut down permanently, you could find yourself quickly going under due to large fines and mounting costs while you are prohibited from operating on a temporary basis.
It’s not worth it; just get your business licenses so you are operating legally rather than take the risk.
In most states, even if you are just an online seller, you are still required to hold a business license or seller’s permit as well as a sales tax permit, even though you don’t have a physical storefront.
Business licenses are available at the federal, state, city, and municipal levels. Check with your Secretary of State to find out what business licenses you need and where to get them.
EINs are provided for free by the IRS. Never pay a site that says you need to pay to obtain an EIN.
In Washington DC, only certain businesses require a basic business license. The Business Licensing Division for DC can better direct you to what licenses your business does or does not need.
While it is true that not all businesses need a business license, it is better to assume yours does rather than assume it does not.