Starting a small business means navigating a checklist of must-have necessities to get the business up and running. Some of these items include incorporating or forming an LLC, obtaining a federal tax ID to open a business bank account, and registering for trademarks that protect names, slogans, designs, and logos associated with the business.
Another essential for small businesses is a business license. Do small businesses require business licenses? The answer is yes to legally operate a business. Here’s what this means on a federal and state level, how to determine which licenses your business needs, and what entrepreneurs need to know about renewing licenses.
What is a Business License?
A business license is a permit obtained through the local or state government. Obtaining this license means your startup is allowed to conduct business within that locality. Once you have received this license from the proper issuing agency and paid a small fee, you are able to keep the business in compliance with the state.
It’s not unusual for small businesses to have several business licenses. According to the U.S. Small Business Administration (SBA), most small businesses need to obtain licenses and permits from federal and state agencies.
Federal vs. State Licenses
How do you know if you need a federal or a state business license? Federal licenses are required for businesses conducting business activities that are regulated by a federal agency.
For example, let’s say your small business operates an oversize vehicle. The SBA notes that this type of business activity is categorized as transportation and logistics. As such, business licenses would be obtained through the U.S. Department of Transportation.
State licenses cover a broader range of business activities. Small businesses in the restaurant or retail industry, for example, must obtain state-issued licenses and permits. These licenses and permits are often specific to your industry and business location, including county, city, and state. Check in with your local Secretary of State for a complete list of the licenses and/or permits your business needs to file for and obtain.
Common Business Licenses
There are many types of business licenses. Ultimately, the ones your business applies for will depend on its needs and location. There are, however, a few common business licenses that pertain to many businesses.
- General business operation license. This license is required for all small businesses that operate brick and mortar storefronts. Having a general business operation license means that the company is legally allowed to operate in a specified location. Similarly, eCommerce businesses are encouraged to obtain this license to legally conduct business in a specific city, county, or state. Remember to pay a small fee with your application and renew the license accordingly. (We’ll share more about renewals in a bit.)
- Sales tax license. This license is a requirement for companies that sell taxable products or are in a region that charges sales tax.
- Seller’s permit. Businesses that sell goods or services online are required in nearly every state to apply for a seller’s permit. It’s important to note that a seller’s permit is still required for companies that sell digital or other intangible products or services.
- Health licenses. Is your business in the service industry and open to the public? If so, it must obtain a health license. This license ensures that the business is fulfilling all requirements to ensure the health and safety of customers that visit the space. Examples of businesses that may apply for a health license include hair salons, nail salons, restaurants, bars, and gyms.
As you file for these licenses, and any others your business may need, remember to pay the filing fee, and submit the completed application to the appropriate issuing agency.
Do I Need to Renew a Business License?
Good question. There may be a few business licenses that are exceptions to this rule, but for the most part every business license you apply for and receive must be renewed in a timely manner. Renewing a license also means paying a small annual fee.
What happens if you don’t renew your business license? Your business may be hit with a penalty fee. These fees may cost hundreds, or even thousands, of dollars. It’s a good idea to renew any outstanding business licenses by their renewal deadline to keep your business in compliance.
How Do I Start Applying for a Business License?
The simplest advice is to start from the city, or county, your business is in and work your way up.
Reach out to the local Secretary of State or a local licensing bureau for information on the licenses your business needs. Then, determine if the business activities may require any federal or state licenses. Once you have a thorough understanding of the licensing requirements in your jurisdiction, you may begin applying to obtain these business licenses.Business & Finance Articles on Business 2 Community