How to Obtain a License for Your Startup
Starting a new business is exciting. You brainstorm ideas, perform market research, design your logo and packaging and reach out to potential customers for input. It’s a thrilling time, but it can also be one of the most confusing and stressful for the budding entrepreneur.
Failing to obtain your business license in the early stages is one of the most common mistakes you can make, and it can come with serious consequences. Whether you’re operating from a home office or renting a small commercial space, it is important to cover all your bases with the appropriate licenses and permits. Fortunately, getting your business license is generally affordable and doesn’t require much time or effort.
Why Do I Need a License or Permit to Operate a Business?
There are many reasons the government requires business owners to have the proper licenses. For starters, licenses and permits protect the public.
Consider the importance of professional licenses. A professional license proves a business owner or employee’s level of expertise, whether they are an attorney, dentist, veterinarian, doctor or hair stylist. As a consumer, when you go for your annual dental visit, you can be confident your dentist has the required education and experience to provide you with an essential service. It’s the same for any other type of business. Customers want to know that you are skilled and reliable, and a business license backs you up.
More than that, a business license allows the government to track your commercial revenue for tax purposes. Every business (except partnerships) must file an annual tax return, but the form you use to complete your taxes depends on your type of business.
If you want to sell goods or services, you may also need a sales tax license. In certain cases, sole proprietors and home-based businesses need a local permit in order to operate legally. When in doubt, it’s always best to err on the side of caution and research your local requirements.
Research Your Local Requirements
The first step in obtaining your business license is to determine where you need to get it. You will need a business license from the city in which your business is located, even if you’re operating from home. Check with the city’s business license department for more information because the fees and requirements vary by location.
If you’re not sure where to start, search for your city’s name online along with the term “business license” to find the right resource. Typically, this means visiting your city’s government offices or county clerk, or you may be able to file certain documents online. Remember, industry requirements do vary by state, so you should research your local city, county and state regulations carefully.
Consider Federal Requirements
In certain cases, your business activities may fall under federal agency regulation. When this is the case, you should obtain a federal license or permit to move forward. This list includes the types of business activities that require federal licensing as well as the issuing agency you should contact:
- Agriculture – U.S. Department of Agriculture
- Alcoholic beverages – Alcohol and Tobacco Tax and Trade Bureau; Local Alcohol Beverage Control Board
- Aviation – Federal Aviation Administration
- Firearms, ammunition, and explosives – Bureau of Alcohol, Tobacco, Firearms and Explosives
- Fish and wildlife – U.S. Fish and Wildlife Service
- Commercial fisheries – National Oceanic and Atmospheric Administration Fisheries Service
- Maritime transportation – Federal Maritime Commission
- Mining and drilling – Bureau of Safety and Environmental Enforcement
- Nuclear energy – U.S. Nuclear Regulatory Commission
- Radio and television broadcasting – Federal Communications Commission
- Transportation and logistics – U.S. Department of Transportation
Understand the Different Types of Licenses
With so many types of business licenses and permits out there, it’s easy to get confused by which one you need. In some cases, your business may only require one license, while others may need multiple permits. These are the basic types of licenses and permits:
General Business License
Almost every business will need a general business license, otherwise known as a local business license, to operate in the county or city in which they are located. Not every municipality or county requires a license, however, so contact your local offices directly to see what’s required.
“Doing Business As” License or Permit
Also called a DBA, the “doing business as” permit is essential if you plan to run your business under a different name. The DBA is a fictitious business name that allows you to conduct business with clients and lenders under a name separate from your legal business name. There are several reasons why business owners may choose to file a DBA, but regardless of the reasons, your state may require it.
Sales Tax Permit
Any business that sells goods, including online products, will need a sales tax permit if the state in which it’s located collects sales tax.
Federal and State Tax Identification Number
Most businesses must apply for a federal tax identification number (EIN) or a tax identification number, also called an employer identification number. Your local government or state may also require a state tax identification in addition to the federal requirements.
Your local zoning regulations stipulate where a business can or cannot operate. For instance, an entrepreneur cannot open a new restaurant in a residential neighborhood for obvious reasons. Zoning regulations may also apply to home-based businesses, although they’re typically not as strict. Make sure the area in which your business is located is properly zoned and that you obtain the right permits before getting started.
Home Occupation Permit
While other licenses and permits may apply in your location, the majority of home-based business owners only need a home occupation permit where applicable. In many cases, you won’t even need a permit.
Restaurants, food trucks, catering companies and other businesses that prepare, handle and serve food will need a health permit. You can obtain a health permit through the Department of Public Health.
Professional and Occupational Licenses
As already mentioned, certain industries require business owners and staff to have professional or occupational licenses. Requirements vary by state.
Fire Department Permits
Any business that is open to the public is involved in a number of people gathering in one location or that uses flammable materials will need a fire department permit. Getting a fire department permit involves an inspection by your local fire department to check for potential hazards.
Some local regulations stipulate that a business must obtain a permit before erecting a sign. These regulations may also have requirements related to the size and placement of the sign.
It’s not uncommon for state and local governments to require environmental permits that help control pollution. If your business engages in any activity that discharges contaminants into the air or water, you will probably need a special type of permit.
Building or Construction Permit
Whether you’re building a new business or making changes to an existing one, you will probably need a building or construction permit from your local authorities before getting started.
Many county governments require the same types of licenses and permits as cities, so even if your business is outside a city’s jurisdiction, certain permits still apply. On the bright side, county regulations are typically not as strict.
Special Licenses and Permits
Many states require certain establishments to obtain special permits to serve alcohol or engage in other activities. Regulations vary by state.
Forming a Limited Liability Company vs. a Corporation
One question entrepreneurs often ask is whether it’s best to start a limited liability company (LLC) or corporation (Inc.). Unless you plan to seek outside investors and generate a lot of profit soon, you should consider starting an LLC.
An LLC is the cheapest and easiest option for starting a business. You choose who the members are and how much percentage each member owns. You’re also protected from personal liability and have fewer regulations to deal with. Best of all, an LLC is not taxed as an entity like a corporation. Instead, the members are taxed according to how much percentage they own in the LLC.
Since most startups lose money during the first couple of years, an LLC offers clear advantages. You can apply any losses to your personal tax return or use it to offset future income. The downside is that LLCs don’t allow shareholders to come in and invest in the business, which can limit how far the company can grow. You will also need to protect your personal assets from company debt.
By contrast, a corporation is a taxable entity which enjoys maximum protections. You must be careful about keeping your company finances in order and reporting any changes. Corporations are also taxed double, but since owners can benefit from outside investments, it’s not really a problem unless you are losing profits.
If in doubt, consider starting an LLC to get your business established. You can avoid the higher tax rates and have a better chance at succeeding during those crucial first years, but you can always choose to convert to a corporation as your business grows. When you want your LLC taxed as a corporation, file IRS Form 8832, the Entity Classification Election. This form takes you through a series of questions to help you determine if your business is eligible to apply for the change. Form 8832 is a complicated document, however, so you should consider filling it out with the help of a business attorney.
Sole Proprietorships vs. General Partnerships
LLCs and corporations aren’t the only options you have for starting a business. A sole proprietorship is a business owned by a single person or couple who alone is responsible for all business debts. In a sole proprietorship, you can report your business profits or losses as personal income and even transfer part of the business as you see fit.
With a general partnership, you share the managerial duties, profits and losses with partners. Each partner is liable for the company’s debt and members must file informational tax returns.
Applying for Your Business License
How you apply for your business license depends on your local requirements, but you will probably need to know your business code to get started. Different types of businesses have different codes, and you’ll need to write yours on the application. Check your local business license website for more information on finding your exact code.
When you are ready, you can then fill out the proper forms. The Small Business Administration is a great resource, and there’s usually an SBA office in every major city. Use the SBA as a resource or go to your city’s website to download the forms. You can also go directly to City Hall to get paper copies. Read the directions carefully so you’re well aware of the requirements and fees for completing the form.
Although every form varies, you will generally need to provide the following information:
- Type of business
- Name of the business owner
- Business address
- Contact information
- Number of employees
- Federal ID number
Drop off or mail your completed forms to the appropriate office or submit them online. You will also need to pay the filing fee, which can range anywhere from $50 to $400. You may also need to pay an additional processing fee.
How long it takes to receive your business license depends on which forms you filed. For example, filing to establish a corporation may take much longer than requesting a DBA. When the license is ready, you may need to pick it up in person so you can prove you’re the business owner. In some cases, the city may take your fingerprints.
After receiving your license, it’s important to follow the ordinances that pertain to your business. If you’ve opened a restaurant, for instance, you will need to display your health inspection where customers can see it. Some cities even require you to display your business license.
There’s a lot involved in starting a business and getting the proper license. If you need additional support as a small business owner, consider funding from an online lender to help your company get off on the right foot.