Before you dive in:
- Have you written out a business plan?
- There are numerous online resources for finding the right licensing requirements.
- Obtaining the right licensing puts you one step closer to operating a business.
What is a business license?
Before you answer the question “Do I need a business license,” it’s helpful to understand what one is. A business license is a document stating you’ve met the requirements to run a particular type of business in your country, state, or local municipality. It gives you the right to conduct business either as an individual or a business entity.
Rules vary from state to state, which can make it slightly challenging to understand which licenses are needed to start a business. The business license rules could even be different from one local town to another. Because of this, it’s critical to make sure you research the exact requirements based on your exact location when deciding how to start a small business.Do You Need a Business License?
In a short — yes, you do need a business license. Almost any business generating income needs to have some type of business license, permit, or registration. This is required to operate legally and within full compliance of government regulations. The type of license you need depends on the business you’re operating and the location.
How Business Licenses Work
The business you choose to operate will determine the exact way the business license will work. But let’s work with a few examples.
The first step is to obtain an employer identification number (EIN). This is a unique 9-digit number assigned to your business by the Internal Revenue Service (IRS). It’s required for almost all businesses by the IRS too.
The good news is, you can apply easily online and it only takes a few minutes to generate if you input the right information. This is required for any business operating within the U.S.
The next step is to register your business with the state where your business is formed or will operate.
In addition to registrations, you may have licenses and permits to obtain. For example, if you are opening a restaurant that services both food and alcohol, you need to obtain both a food and alcohol license from the state, and a fire and a health department permit from your local county, plus other required licenses. It is important to consider these costs when calculating your business startup costs.Types of Business Licenses
Businesses come in all shapes and sizes and perform a variety of functions, so naturally there are numerous types of business licenses you will need to consider when exploring how to become an entrepreneur. Some businesses only require simple setup with an EIN and then they are legally ready to start operations. Others, such as our previous restaurant and bar example, require multiple licenses and permits. The key is to first register your business for an EIN and with your state, and then research what is required at the local level on up.
- Business operating license: These are simply the licenses required by your local and state governments to operate your business.
- DBA or fictitious name statement: This is known as your business’ trade name and you would apply for this if your business will operate under a different name than what you register with.
- Seller’s permit: This permit gives you permission to collect tax on a retail transaction. This is required by most states.
- Special permits: A broad term applied to any type of permit required for buildings, environmental, signage, or other categories defined by the local or state government.
- Industry licenses: Licenses given to individuals meeting professional requirements. Examples of this include hairdressers, electricians, plumbers, real estate, attorneys, health professionals, and others.
- Federal licenses: This is required for any business under federal regulation. Examples of this include mining, agriculture, aviation, alcohol, firearms, and broadcasting.
How To Get a Business License
Getting the right business license and permits in place is an essential part of business ownership. Here are the general steps needed when you’re ready to move forward with business operations.
1) Form Your Business Entity. This is what type of business you will operate as. This is an ideal time to bring in a professional for advice, such as tax accountant or attorney. Common business entities include:
a. Sole proprietor. The business is run by one person with no legal separation between the person and business.
b. Incorporated business. A legal entity is formed and it is separate from the owner or owners.
c. Limited liability company (LLC). A private company separating the owners from a business and providing a pass-through for tax purposes.
d. Nonprofit corporation. A legal entity set up for a social benefit versus earning a profit.
2) Apply for an Employer Tax Identification Number, or EIN. This is required for some businesses or optional for all, and can be set up online. You should note, this is a free service from the IRS.
3) Determine Which License(s) You Need. If you don’t know where to start, your city hall or courthouse can point you in the right direction for local and state permits and licenses. You could also use your local Chamber of Commerce as a resource.
4) Apply for a Business License. Once you determine which ones you need to operate your business, start the application process. It’s up to you to ensure you are applying for all necessary licenses.
5) Renew Your Business License. Most licenses need to be renewed on an annual basis, but some allow for a lengthier renewal period.
