How to get a business license
What is a business license?
It’s a document, typically issued by your state or local government, that allows you to legally operate your business within that state or local jurisdiction.
Why do you need a business license?
There are many reasons why you should obtain a business license as soon as you decide to start a new business:
- A license is required by law.
- It communicates to potential customers that your business is legitimate.
- It gives you the documentation you need to open bank accounts for your business, obtain business loans, or seek economic development and business development grants.
- Failure to obtain a license could result in costly fines or your business being shut down completely.
What types of business licenses and permits do small businesses need?
Licenses your business may need include:
General business license. Commonly required by local governments of all businesses within their jurisdiction. There will likely be a fee or business tax involved with this license.
Sales tax permit. Also known as a seller’s permit or a sales tax license, a sales tax permit is required by many states and local governments for any business that sells goods and services to the public. You have to collect and pay any applicable sales taxes.
Payroll tax registration. You’ll have to register with both the state and federal government. You’ll also have to pay payroll taxes such as Social Security, Medicare, and unemployment.
Signage permits. Check with your local government to see what type of signage is allowed for your business. If you run your business out of your home, you should also check with any homeowner’s association you belong to, as it will likely have its own restrictions.
Fire department permit. May be required by your local government for any business that’s open to the public.
How to apply for a business license
Before you start your business license application, you'll have to begin the process by choosing the name you’ll be doing business under. It’s a good idea to make sure that your business name isn’t too similar to other businesses in your area in order to avoid any confusion.
1. Decide which type of business structure you will have:
Sole proprietorship is the simplest type of business to form. Your income and losses from the business are reported directly onto your personal income taxes.
General partnership. Two or more people own the business together and share in the profits and losses that appear in the individual tax returns of the business owners.
Limited partnership. The owner, also known as a general partner, maintains all personal liabilities for the business while relying on outside investors and silent partners for funding.
Limited liability company. An LLC allows multiple owners to form a partnership where each participant’s share and responsibilities are spelled out in the LLC’s Articles of Organization.
C corporation. Owned by one or more stockholders who choose a board of directors to run the company. While more complicated to form than the options above, it offers liability protections to the company’s owners, directors, and officers. The corporation files its own taxes as a separate entity.
S corporation. Similar to a C corporation, with liability protections for the owners, but the profits and losses apply directly to the owner’s tax returns. It’s often used when the owners all work for the company.
2. Obtain an Employer Identification Number
You’ll need to apply for a free Employer Identification Number with the IRS. The EIN, also known as a Federal Tax Identification Number, is like a Social Security number for your business that you will need to open a bank account and to file taxes for your business. You’ll need to provide information such as your type of business, your revenue expectations, and contact information.
3. Gather your licensing data
When applying for a business license, you may be asked to provide the following information:
- Your EIN
- Your business’ name, ownership information, and its legal structure
- Government issued identification, such as a driver’s license
- Your business address and square footage
- A business plan or some description of your business activity, such as the products and services it offers
4. Find out the type of business licenses you’ll need
Check the business license requirements for your state and local government to see if your business structure requires a license, and if so, which type of license you’ll need. At the local level, your city or county clerk’s office is a good place to start. You can find more information on your state government licensing requirements at Cityapplications.com. Your local secretary of state’s office can also provide information. You might also check with your state’s department of revenue.
If you plan on doing business in another state, you may need a business license for that location as well.
For a local business license, you may need to have your business location inspected to make sure it complies with zoning requirements, building regulations, and health and safety standards.
5. Check for additional licensing requirements
If your business involves agriculture, alcoholic beverages, transportation, or similar industries that involve federal regulation, you may have to apply for a license with a federal agency. The U.S. Small Business Administration (SBA) has more information on federal licenses for the small business owner.
There are many other industries that are regulated at the state level and require an occupational license. You’ll likely have to pass a certification test and prove that you meet your state’s bonding and insurance requirements. Such professions include building trades, insurance, cleaning services, plumbing, and real estate.
Some professions, such as a general contractor, may be required to carry a surety bond, general liability coverage, and other policies before getting certified. Consultants, on the other hand, might not be required to get a certification, but may find it beneficial to do so.
6. Display your licenses and permits
You may be required to post your licensing and permit documentation at your business. Many business licenses have to be renewed every one or two years, so make sure you keep track of any deadlines for license and permit renewal.
How much does a business license cost?
The license fee really depends on your industry and location. The cost of a standard business license could range from $50 to hundreds of dollars, plus renewal fees if required. If you need an additional license because of your profession, that could bring more costs based on your state and industry.
How long does it take to obtain a business license?
It can take as little as a day or several months to obtain a business license, depending on the nature of your business, government regulations, and the licensing requirements of your profession.
What else does my small business need?
After you’ve met any local, state, and federal licensing requirements, your business might also have certain bonding and insurance requirements.
Surety bonds are often required for those in financial advisement, such as insurance and mortgage professionals, as well as those working in transportation and construction. You might also need a surety bond to meet contract requirements with certain customers, especially when dealing with government entities.
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