Getting a business license might seem like administrative drudgery, but your company isn’t legit until it’s in compliance with local, state and federal licensing requirements. Depending on the general types of business you conduct and your specific business activities, you might also need a business permit, registration or certification.
Why Do I Need A Business License?
Getting a business license serves two primary purposes:
First, it ensures that your taxing jurisdictions know to collect any business taxes you’re required to pay.
And perhaps more importantly, licensing helps to protect the public against unscrupulous practices.
In addition to obtaining a business license, you might need a business registration, permit or certification, usually from your local and state governments. But depending on the structure and nature of your business, federal licensing and registration might be required, too. In this process, you may as well seek professional advice from some of the best LLC formation service / best registered agent service out there such as Nolo, Rocket Lawyer, Zen Business, or IncFile , each providing various legal assistance.
Businesses That Need Federal Business Licenses
Most businesses do not need a federal business license or permit, but there are exceptions in cases where the federal government regulates the business activity you’re engaged in. The Small Business Administration lists the following industries as falling into that category:
Firearms, ammunition and explosives
Fish and wildlife
Mining and drilling
Radio and TV broadcasting
Transportation and logistics
State Government Business License Requirements
State licenses and permits are more common than federal ones. Maryland, for example, regulates over a dozen industries, such as construction and liquor, through the Comptroller’s License Bureau. It regulates 26 more, including real estate sales and appraisals, locksmithing and home improvement, through the Department of Labor’s Occupational and Professional Licensing office. Texas requires licenses for 38 types of businesses ranging from air-conditioning and refrigeration contracting to weather modification. Most states also have state tax permit requirements as well.
Depending on your company’s corporate structure and your state's specific requirements, you might have state filings to square away before you can apply for a business license. Research the requirements of your state and business type to determine exactly which business licenses you're required to get.
You’ll also need a federal tax ID number. And if you incorporate outside of the state(s) where you’ll conduct business, you’ll likely need a certificate of authority, or sales tax certification, which essentially establishes your company for the purpose of sales tax.
Local Business License Requirements
Your local governments — city or county — have licensing and permit requirements of their own, and like the state and federal systems, their purpose is to protect the public and ensure that businesses are taxed properly. In some cases, whether you qualify for a business license depends on your taxes being paid up. Worcester County, Maryland is a good example. The county treasurer’s office must sign off on every business license application, and it only does so after verifying that the applicant has paid business and personal property taxes. Including the cost of a refundable personal property liability fee, Worcester’s total business license fee can be anywhere from $150 to $900.
How To Get a Business License in 7 Steps
The exact steps for getting a business license vary by business type and location, but there are some general steps most business owners must take to apply for licenses and permits, according to the Chamber of Commerce. Here are instructions on how to get a business license:
1. Apply for your federal tax ID, also known as an employer identification number, from the IRS. This isn’t mandatory if you’re a sole proprietor with no employees, but even in that case, having it can help you establish business credit and keep your business finances separate from your personal ones.
2. Choose a legal structure of your business, LLC, LLP, S Corp C Corp etc., and — unless you’re a sole proprietor — register your company with the state by filing your articles of incorporation. If you’ve already done that, determine what filings you’re required to make moving forward. You might have to file an initial report the year you incorporate, for example. After that, articles of amendment notify the state of significant changes, such as changing the business address. And most companies must file an annual report or biennial statement, which can carry a fee of up to a few hundred dollars, according to the SBA.
3. Register your business name. Companies with business names that are different than the names under which they’ll operate must file a “doing business as” to register the fictitious names in most cases. Individuals whose business names are their own names plus a descriptive term for what they do, such as Jane Smith’s Accounting Services, might not need a DBA.
4. Contact your county zoning office. It’s important to make sure your business location conforms with zoning codes. You’ll need permits if you’re constructing or remodeling a building or will change its use, such as converting a residence to an office — even if your business will be based from a home office. Some municipalities, such as Santa Rosa, Calif., require that you submit zoning clearance before you can get your tax certificate.
5. Apply for a business tax certificate. A tax certificate, also known as a sales tax license or seller’s permit, is a necessity for any business that will collect sales tax in the state and/or municipality where it operates. Some, but not all, online businesses are exempt from collecting sales tax in the state where they operate.
6. Determine whether you need a special license from your state. Selling alcohol, lottery tickets, fuel and firearms generally requires a special license. You might also need an occupational license — occupational licensing requirements vary by state, but common ones are real estate sales, cosmetology, legal and medical services and trades such as electrical, plumbing and heating and air conditioning. Contact your state government for information. Once you meet the criteria, it’s often possible to complete the forms for licensing and submit your application online.
7. Contact your municipal and county governments to find out what their licensing requirements are. The local agencies can also tell you what business permit office accepts business license form submissions and what the procedures are.
In Ocean City, Maryland, for example, businesses must submit a business license application each year. The application contains contact information for the business owner and information about the business. The city’s mayor and city council approve the application and issue the license after verifying that the business owner has paid their licensing fees in full.
How Much Does a Business License Cost?
Costs vary widely by location and type of business. In Ocean City, Maryland example, a small café with fewer than 25 seats pays $116 per year, whereas a retail store pays $1,167. In Newark, N.J., license fees range from $10 for a pet shop to $1,500 for an arcade, restaurant or laundry facility. This is in addition to state general and occupational licenses that might be required. Also, be prepared to pay an application fee.
Taking the Next Step
The SBA is a good starting point for researching licensing fees. Its website has a state lookup tool to direct you to the correct agency for your state.
Of all the steps involved in getting your startup off the ground, licenses and permits are probably the most tedious. But a misstep at his point can derail your business — or even put you out of business — so consider the time you spend getting the legalities in order to be time well spent.