A small-business license can refer to any number of registrations, licenses or permits issued to businesses at federal, state and local government levels. So, which do you need? Registrations, licenses and permits all refer to something slightly different.
A registration informs the government about the existence of your business, primarily for business tax purposes, and therefore allows a unique tax identification number or employer identification number to be issued to all types of businesses.
Different business licenses exist to help the government regulate particular industries and ensure that the license holder is qualified to engage in that business. Sometimes, an exam is required to earn a license, and other times, it involves more of a registration process.
A business permit is typically issued after an inspection and help regulate an industry from a public-safety point of view, such as a fire department permit for following proper fire safety regulations.
Examples of Businesses That Need Licenses
Common licenses and permits that pertain to small businesses include a home-occupation license, a "doing business as" (DBA) registration, a food permit or vending machine permit, a building permit and a seller's permit. Plus, general business registration is also required, as is a tax-withholding permit and a payroll license.
What about sole proprietors? The typical rule of thumb is that you don't need to register as a sole proprietor or freelancer as long as you do business under your own name. As soon as you have a new business name, it's wise to get a business license. In addition, you may still need licenses and permits based on your business activity.
Common businesses or sectors that need special licenses or permits include:
- Child care centers
- Restaurants or caterers
- Agricultural businesses
- Service trades like plumbing or electrical contracting
- Health care centers
How to Get a Small-Business License
You'll need to check with the federal, state and local governing bodies to learn about the various license requirements for your small business. For example, you'll need to register at the federal level to obtain an employee identification number for tax purposes. You also many need a city or state business license.
The easiest way to make sure your small business is completely legal in terms of registrations, licenses and permits is to talk to your local Secretary of State, County Clerk, Department of Revenue or equivalent state government office. You can typically look at the rules and regulations online, but don't hesitate to get on the phone if you feel confused about the business licensing procedure. Explain the type of business you're starting, and the representative should be able to point you in the right direction or even mail the paperwork to you. The Secretary of State's office can also point out state and federal regulations.
The U.S. Small Business Administration (SBA) is another good business resource for finding information about federal, state and local licenses and permits. If you find you're really getting bogged down and confused about laws and paperwork, a lawyer can help ensure your business is completely legal.
Licensing and Renewal Fees
As you research the types of small-business licenses that you need, make note of any filing or renewal fees. For example, it can cost several hundred dollars to fill out the license application to take the journeyman plumber's exam in most states. Include renewal fees in your annual budget for accurate accounting and to avoid surprises.
Do Your Employees Need Licenses?
In highly regulated industries, licensing your small business may not be enough to keep you legal. Your individual employees may need to be licensed as well. For example, accounting firms need licensed CPAs, legal firms need licensed lawyers, schools need licensed teachers and a therapy office needs licensed therapists.
That doesn't mean all of your employees have to be licensed, but it does affect the work your employees are legally allowed to perform without a license.