There are many rules and regulations that dictate how, where, and when a business can legally operate. Business licenses can be a nuanced issue to navigate, specifically because requirements can vary significantly from region to region.
If you are an entrepreneur and are doing business as a startup, or are a small business in your town, here’s what you need to know about business license requirements and the steps you must take to legitimately operate your business in compliance with local law.
What Is a Business License?
“Business license” is a broad term that refers to several specific licenses a business must obtain to operate above board. The term business license is sometimes used to refer to a professional license or occupational license that industry professionals are required to obtain before they’re allowed to provide services to the public in a specific area.
Each state has different business licensing requirements, but local governments ultimately implement the requirements. Business owners should be most mindful of how licensing requirements will impact their ability to do business on a local level.
Requirements will be specific to the city, county, parish (Louisiana, Alabama), or borough (New York, Alaska) where your business was established.
Why Do Business Owners Need a Business License?
States can require business owners to obtain a business license based on their own legal reasoning. In the majority of cases, business licenses are a requirement of the city or county where your business is established rather than by the state itself.
The majority of states don’t require business owners to obtain a general business license. Florida, for example, only requires that certain professionals obtain special licenses to comply with industry regulations.
Doctors, lawyers, accountants, and real estate agents need valid professional licenses, but not business licenses.
Here are the states that require a general business license for anyone doing business:
- Alabama
- Alaska
- Delaware
- Hawaii
- Maine
- Maryland
- Nevada
- Tennessee
- Washington
A locale usually establishes business license requirements, and each locale can utilize different reasons for why it requires a business license. The common thread is that a business license assures compliance through official oversight. It’s easier for a local government to keep track of professionals and business transactions if each business receives the appropriate license for its designation.
Business licenses can also be an important tool for ensuring that businesses are implementing the best safety practices. Medical professionals, construction workers, finance workers, and people who deal with hazardous chemicals have a duty to ensure that they aren’t harming people or mismanaging their money. A business license adds a new level of accountability.
What Are Some of the Different Types of Business Licenses?
There are several types of business licenses, and the requirements for which license(s) a business must obtain will vary by locale. Depending on the type of business entity you operate or intend to establish, you may need at least one of these licenses.
General Business License
A general business license is called a Business Privilege License in Alabama and a General Excise Tax License in Hawaii. The remaining seven states that utilize general business licenses simply refer to them as business licenses. A general business license is a requirement utilized by a handful of states that requires businesses to officially register for a license with the state’s licensing authority.
Tennessee business owners need to apply for a general business license if their total annual sales exceed $10,000. Businesses with less than $10,000 in sales per year can instead apply for a Minimal Activity License designed to cover small-scale independent “side income” ventures like crafts, handmade goods, and vintage resale businesses.
Professional License
Almost every state or locale requires certain professionals to obtain a professional license. The purpose of a professional license is largely to maintain public safety. Medical professionals, legal professionals, accounting professionals, investment advisors, construction professionals, real estate workers, barbers, and cosmetologists are often required to obtain a professional license. “These licenses also give professionals credibility in their community,” clarifies Taylor Fike, Partner at Fike Advisors and Expert Contributor for Mosey.
There are usually ongoing requirements to maintain a professional license. Professional licenses are only issued to individuals who have successfully completed formal education or training in their field, allowing them to perform their jobs safely. Renewal fees and license validity periods may vary by state or profession.
Sales Tax License
Currently, 45 states utilize sales tax. A sales tax license permits a business to collect sales tax from their customers and remit it to the state Department of Revenue.
This requirement won’t apply to business owners in Alaska, Delaware, Montana, New Hampshire, and Oregon where sales tax isn’t utilized. It also won’t apply to business owners in sales tax states who exclusively sell goods or services that aren’t eligible for sales tax.
Building and Construction Permits
Almost all building or construction projects require a permit for each job completed. Building permits are generally easier to obtain than licenses because contractors must obtain them so frequently.
Building and construction permits work to ensure that jobs are completed safely, workplace safety measures are enacted, and work is completed per local building codes.
How Does Your Business Structure Influence Your Licensing Requirements?
Anyone operating as a sole proprietorship or independent contractor often won’t need a business license. If you are a sole proprietor, you can typically use your social security number instead of an EIN (employer identification number) or tax ID and perform your work normally.
This may not always be the case. It’s best to verify requirements with your local licensing authority before making any assumptions that can jeopardize your business.
Licensing requirements are generally geared towards corporations and partnerships. If you own a limited liability company (LLC) or a limited partnership (LP, LLP, LLLP), you’ll likely need at least one type of business license.
Professional licenses are usually required for skilled tradesmen who operate independently or rent a workspace in a larger establishment, like hair stylists and tattoo artists. The requirements for these types of licenses are slightly different and may involve specialty courses, like first aid or pathogen sanitation training.
How Does Your Business Location Affect Your Licensing Needs?
Your business location is the single largest determining factor in your licensing needs. Since licensing needs are established primarily by local governments, you’ll need to check with your local licensing agency regarding licensing requirements specific to your business.
You will always need a general business license in states where it is required, but you may need additional licenses to satisfy requirements on a local level.
What Are the Tax Considerations Linked to Business Licensing?
Some business licenses are specific to tax considerations. General business licenses are sometimes called business tax receipts because they serve as proof that your business is registered with the IRS and federal government for business tax purposes.
A sales tax permit is important for businesses that are responsible for collecting and remitting sales tax. A general business license, when required, is necessary for almost everything a business does, including tax compliance.
How Can You Determine What Business Licenses You Need?
The best way to determine what business licenses you need is to check with your local licensing authorities for compliance. Local business license requirements vary.
The requirements in your town may be completely different from the requirements in the next town over. The only way to be sure that your business is compliant is to verify with relevant agencies.
The U.S. Small Business Administration (SBA) offers resources for licensing requirements and specifics regarding which types of licenses may be necessary for business in certain industries. Their resources are an excellent starting point for people in the early stages of forming a small business.
The U.S. Small Business Administration may also be able to direct you to the proper state government agency to accept your business license application submission and tax registration paperwork.
Simplify Your Business Licensing Process
Meeting licensing requirements is one of the most important aspects of business compliance. Compliance should be the first major initiative on your checklist if you’ve started a business or intend to start business activities. Failing to secure the proper licenses can jeopardize your business before it begins.
Mosey offers automated compliance solutions for existing and new businesses of all sizes, including small startups. Our tools can help you verify that you’ve received the proper licenses your business needs and that your licenses remain in good standing, even acting as your registered agent.
Schedule a demo with Mosey to learn about how Mosey can help you maintain compliance while you work on building your financial future as a successful business.
