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ComplianceOctober 17, 2022

Understanding business license requirements and obligations

The number of agencies at the federal, state, and local levels give rise to a multitude of business license, registration, and permit requirements. These requirements vary by location and by type of business activity.

In this article, we discuss business license requirements and obligations for the state, federal, and local levels along with the different types of licenses.

Why business license compliance matters

Throughout the lifecycle of your business, you must adhere to a host of legal obligations at all government levels — federal, state, and local. These include taxes, business registration, and employment requirements, as well as licenses and permits.

Before you begin operations, you must ensure that you obtain the right licenses, permits, and tax registrations. Licensing requirements exist to regulate your business and protect the public. Licensing can also help you position your business for growth and to maintain a positive public image.

A failure to comply with business licensing requirements can result in fines, penalties, arrest, and even the closure of your business by tax and licensing authorities.

Business license types

There are many different types of business licenses, but required licenses, registrations, and permits may be placed into four broad categories:

  • General licenses and filings. These include sales tax permits, workers’ compensation filings, and payroll forms. For example, most states impose sales and use taxes. Businesses required to collect these taxes must comply with any registration, license, or permit requirements.
  • Regulatory permits. Business operations in certain industries, such as construction, transportation, and food, typically require regulatory permits.
  • Local licenses and filings. Local jurisdictions, such as cities and counties, typically impose licensing requirements on a wide variety of businesses.
  • Professional licenses. Professional and occupational licenses demonstrate a level of skill or knowledge required to perform a certain type of job. These licenses are issued by a federal, state, or local government agency and grant legal authority to work in an occupation.

Licensing, registration and permit requirements vary by jurisdiction, as well as by the type of business or activity within a locality. The procedures for complying with assorted licensing requirements also vary among states and municipalities.

Business license and registration requirements for new businesses

If your business is required to collect sales and use tax, you must comply with registration, license, or permit requirements from the state tax authorities. Other common business licensing requirements include:

  • Basic business license
  • Tax ID number (aka EIN or FEIN and state tax numbers)
  • Home occupation permit
  • Zoning permit or land use permit
  • Health department permit
  • Building permit
  • Alarm permit
  • Fire and police department permit

Note: A home-based or online business often requires the same level of compliance as a traditional brick-and-mortar commercial establishment. In addition, there may be licenses specific to home-based businesses. For example, many cities or county governments require home-based businesses to have a “Home Occupation Permit.” 

Read the related article: Do I need a business license or permit for my home or online business?

Professional or occupational licenses

Some businesses require more licenses. For example, industries, like daycare or aviation, are more highly regulated than others. Other kinds of businesses that require professional or occupational licenses include the following:

  • Agriculture (pesticides and fertilizers)
  • Animal-related
  • Construction
  • Debt Management and Collection
  • Financial services
  • Firearms and Explosives
  • Gaming
  • Hazardous materials
  • Healthcare
  • Insurance
  • Mining and Oil/Gas
  • Pharmaceuticals

Licensing requirements can change along with your business

If you make any changes to your business — such as growing the business, dissolving the business, or adding a new product line — you may trigger new compliance obligations.

A common trigger is if you expand into a new state or municipality. Because license requirements vary by location, you should ascertain the need to obtain any additional licenses. These requirements could differ from those of your business’s current location.

Note: Any licensing costs necessary to support business operations, or to carry out an expansion or contraction, should not be forgotten in annual budget planning.

Changes that can bring about the need for a new license include:

  • Launching a new product or service line
  • Changing a name
  • Changing the business structure (e.g. incorporating a sole proprietorship or partnership)
  • Remodeling
  • Address change
  • Ownership change
  • Opening or adding a new location

If you decide to dissolve your business, any current licenses will need to be canceled. As with the initial filings and renewals, this may need to be done at the federal, state, and/or local levels.

Business license fees and enforcement

Many jurisdictions are moving towards increased regulations and oversight and stricter licensing requirements. Consumers, business partners, employees, and shareholders are also demanding greater compliance and transparency. Furthermore, many jurisdictions are considering or adopting increased licensing fees or requirements to offset budget shortfalls.

Enforcement efforts against unlicensed businesses are also on the rise. As a result, it’s critical that you reevaluate how you manage business license compliance. Any violation risks negative publicity, adverse public perception, and damage to your company’s good name and positive reputation.

Penalties of business license noncompliance

A failure to maintain the right licenses or pay licensing fees could result in a variety of consequences since each jurisdiction may levy its own penalties. For example, you may face fines from the licensing or tax authority or be forced to cease operations until the violation is addressed. Violations can even lead a business or business owner to be subject to liens or criminal penalties.

Compliance failures can also affect the timely implementation of strategic business decisions. For example, they could result in:

  • Delayed mergers or acquisitions
  • Delayed expansion of product lines or services
  • Delayed opening of new locations
  • Company officials being summoned to appear in court
  • Adverse publicity that negates brand-building

Don’t underestimate the potential impact of licensing noncompliance, especially if you have been operating in a less aggressive enforcement area to date.

Here are examples of unlicensed business operations featured in the media,

  • In Washington D.C., a bike store was fined $2,000 for selling food items without the appropriate food license. Read more.
  • Even companies that do not operate solely as charities must obtain licenses for charitable sales promotions under some state charitable solicitation laws, which among other rules, establish registration and bonding requirements. Read more.
  • A funeral home was put under investigation for operating without a license. Although both the business and its director had their licenses permanently revoked, they continued to operate. The director claimed that he was unaware that his license was permanently revoked. Read more.
  • New Jersey fines loan modification companies for operating without a license. Read more.

What should I do about a licensing compliance failure?

Check to see if you are eligible for a license amnesty program. Even if such a program does not exist, contact the proper licensing agency and address any failure immediately. Don’t wait for the agency to implement enforcement measures.

Easily manage complex requirements
There are over 75,000 federal, state, and local jurisdictions.  As their compliance requirements become more complex, we’re the partner that can help you manage them all.

Managing business license compliance

Laws and regulations are continually changing, along with the number and types of licenses, permits, or registrations your business may need.

You may choose to manage your licensing obligations internally. Another option is to outsource licensing compliance management to a professional service provider. These third-party companies can offer different levels of service. For example, a provider may offer research services, preparation and filing services, or full outsourcing services.

  • Business license research services are a useful tool if you prefer to file yourself since they can identify any compliance gaps and actions you need to take. This type of service is generally provided on a one-time basis.
  • Preparation and filing services build on the gap analysis performed by a research service provider. They obtain, prepare and file licenses on behalf of your business and are hired on an as-needed basis.
  • Full outsourcing services provide ongoing licensing management. They typically manage renewals and handle compliance changes throughout the business lifecycle.

Conclusion

Regardless of the size or type of business, business license compliance is complex. It is important to keep up with licensing requirements to maintain the legal health of your business and to avoid unnecessary fines and penalties. Having the right compliance strategy will provide your company with a solid foundation for success.

CT Corporation can help

Outsourcing business registration and license research, applications, management, and renewals can help you take the pressure off internal resources. By working with a full-service management provider who specializes in the efficient processing of business licenses, permits, and registrations, you can free up your time to focus on starting and growing your business while ensuring you keep up with changing compliance requirements.

For more information on CT Corporation services and how we can streamline your business licensing, please contact us or call us at (844) 701-2064

 

Troy Ayala
Compliance Business Consultant

Troy Ayala is a Compliance Business Consultant for CT Corporation. His responsibilities include research, delivering onsite training, and assessing CT Corporation customer workflow management for all transactions, including entity management.

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