Many small businesses will require a business license to operate and it is important for owners to research and comply with these licensing laws to avoid putting their investment at risk. As a general rule, most businesses require a license, whether it is because food is being sold, the business requires a land permit or because the area has specific tax laws. Owners should also remember that business licenses are often required even if the business is run out of the home, although variances are becoming more common as a result of economic shifts and how people choose to make money. For more on this continue reading the following article from The Street.
Business owners must comply with government requirements regarding business licenses, permits and tax registration — usually before making their first sale.
But knowing which forms to fill out at the county, state and federal level can be confusing and time-consuming.
"The biggest concern is, ‘Did I find them all?’ That’s where people get nervous," says Deborah Sweeney, CEO of MyCorporation, an online document filing and research assistance service for small businesses forming limited liability companies or corporations.
Sweeney answered a few basic questions on the topic of business licenses.
Why do small-business owners need a business license?
Sweeney: A business license is a type of legal authorization to operate a business in a city, county or state. A license may even be required on a federal level. In order to determine whether or not a license is necessary, you should first check with the state and/or county in which your business is located.
As a general rule, most business need one or more federal, state, county or local licenses or permits in order to operate. Licenses and permits can range from basic to extremely specific, depending on the location and type of the business.
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Imagine you want start a sidewalk or street vendor business such as a food truck in Los Angeles. A sample of the city’s required permits and licenses include a business license, zoning approval and a land use permit. County permits may include a fictitious-name filing and a public health operating license. State permits and licenses may include occupational safety and health information, sales and use information and workers compensation information.
Do small-business owners need a license if they run their business out of their home?
Sweeney: Investigate local zoning ordinances covering home-based businesses. Some residential neighborhoods have strict zoning restrictions that may prevent you from doing business out of your home. Condominiums and planned communities may have bylaws that could affect your ability to do business out of your home. Yet it may be possible to get a variance or conditional-use permit. In many areas, attitudes toward home-based businesses are becoming more supportive, making it easier to obtain a variance.
What is an Employer Identification Number?
Sweeney: An Employer Identification Number, or EIN, is also known as a federal tax ID. It is similar to a Social Security number for your business and allows you to identify your business on important government forms and official documents. Oftentimes, wholesale distributors require either a federal tax ID or a seller’s permit from a retailer.
An EIN can be considered a business license. It gives you the tax ID that banks require, but sometimes they don’t title it as a business license. It’s more of a federal filing.
You are required to have an EIN in some, but not all circumstances. An EIN is required if:
- Your business has employees.
- Your business is a corporation or partnership.
- You file any of the following tax returns: employment, excise or alcohol, tobacco and firearms.
- You withhold taxes on income paid to a nonresident alien.
- You are involved with: trusts, IRAs, estates, real estate mortgage investment conduits, nonprofit organizations, farmers’ cooperatives or plan administrators.
What happens if I do not obtain the correct business licenses?
Sweeney: A business owner who does not comply with licensing and permit regulations can draw expensive fines and put their business at serious risk. Staying current with local and statewide business requirements will help ensure success and stability for a business.
What are some common mistakes made with business licenses?
Sweeney: The first one is [business owners] don’t file at all or they are missing a filing and somehow down the road they realize the city or county is trying to fine them for penalties. Or they file information incorrectly and then get rejected. That’s frustrating and time consuming. Business owners should know to research and file a business license for your particular jurisdiction.
Many times businesses have to publish in a newspaper this license information. Many jurisdictions require you do it within 30 days [of obtaining the license]. It’s sort of an old-school formality giving notice that you are claiming the right to a business name or request of a particular license.
How much should business expect to pay for a license?
Sweeney: The average price is about $50. Some don’t charge at all, but there are some counties, like in New York, that charge as much as $500. It’s usually just a one-time fee but many states [require business owners] to renew after five years. Most states just want to know you’re still doing business. It’s updated paperwork, not the complete paperwork.
This article was republished with permission from The Street.