The number of agencies at the federal, state, and local levels gives rise to a maze of business licensing, registration, and permit requirements. These requirements vary by location and by type of business activity. Consequences of noncompliance also vary, ranging from fines to criminal sanctions to operational shut-down.
Managing business license obligations
Compliance is good for business
Throughout its life cycle, a business must keep up with a host of legal obligations at the federal, state, and local levels. These typically include (but are not limited to) taxes, business registration, and employment requirements, as well as various license, registration, and permit obligations.
The required licenses, registrations, and permits may be placed into three 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. Various local jurisdictions, such as cities and counties, typically impose licensing requirements on a wide variety of businesses.
Companies would be well-advised to avoid the risks incurred by licensing, registration or permit violations, which can include not only fines and penalties but also arrest or the closing of business operations by tax and licensing authorities.
Good licensing compliance helps a business to remain positioned for growth and to take advantage of unexpected benefits and opportunities. Good compliance can also help a business maintain a positive public image.
License, registration, and permit requirements vary by location and type of business
Licensing, registration, and permit requirements vary by locality, 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.
Practice pointer: A business that discovers a compliance failure should check to see if it might be eligible for a license amnesty program. Even without such a program, it is generally better for a business to contact its advisor and address a failure immediately, instead of waiting for authorities to implement enforcement measures.
Business license compliance for new businesses. Businesses that have to collect sales and use tax have to 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
Practice pointer: A home-based or online business often requires the same level of compliance as a traditional bricks-and-mortar commercial establishment. In addition, there may be licenses specific to home-based businesses. For example, many city or county governments require home-based businesses to have a “Home Occupation Permit.”
Some businesses require more licenses. Some industries, like daycare or aviation, are more highly regulated than others. These kinds of businesses include the following:
- Agriculture (pesticides and fertilizers)
- Debt Management and Collection
- Financial services
- Firearms and Explosives
- Hazardous materials
- Healthcare and Social Services
- Mining and Oil/Gas
Compliance concerns for the growing, existing or dissolving business. Changes to your business can often trigger changes to your compliance obligations.
Practice pointer: Any licensing costs necessary to support business operations, or to carry out an expansion or contraction, should not be forgotten in annual budget planning.
Expanding into a new state or locality calls for complying with any new licensing requirements. Because license requirements vary by location, expanding businesses should ascertain the need to obtain any additional licenses when entering a new area. These requirements could differ from those of the business’s home location.
A change in business operations could also bring about the need for a new license. These types of changes include:
- Launching a new product or service line
- Changing a name
- Changing the business structure (Ex. incorporating a sole proprietorship or partnership)
- Hiring minors
- Address change
- Ownership change
- Opening or adding a new location
If a decision is ever made to dissolve a business, any current licenses will need to be canceled. As with the initial filings and renewals, this may need to be done at some or all federal, state, and local levels.
Fees and enforcement
In some jurisdictions, today’s regulatory landscape has moved toward increased regulations, oversight, and licensing. An increasing focus on compliance and transparency has also come from consumers, business partners, employees, and shareholders.
To alleviate financial and budgetary constraints, some localities are considering and adopting new or increased fees or requirements. Some authorities have also increased enforcement efforts against unlicensed businesses. As a result, many companies are experiencing a growing need to reevaluate how they manage business license compliance.
Practice pointer: In today’s compliance-focused climate, a “pay-the-fine-as-necessary” approach, which may have “worked” in the past, is likely not the best approach. Since business licenses are public record, a violation risks negative publicity, adverse public perception, and damage to a company’s good name and positive reputation.
Consequences of failing to comply. Failing to maintain the correct licenses or pay the necessary fees could result in a variety of consequences, because each municipality may levy its own penalties for noncompliance. For example, the business may have to pay fines for a violation. Also, tax and licensing authorities may force cessation of business operations until the violation has been addressed. In some cases, violations could incur liens or carry criminal penalties.
Practice pointer: Some businesses underestimate the potential results of licensing non-compliance, especially if they have been operating in less aggressive enforcement areas to date.
Compliance failures could 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
- Damage to the company’s reputation and goodwill
Managing business license compliance
Laws and regulations are continually changing, along with the number and types of licenses, permits, or registrations a business may need. Maintaining proper compliance requires staying up-to-date with the different license, permit, and registration procedures of the various governmental authorities.
A business may choose to manage its licensing obligations internally. Another option is to outsource licensing compliance to a service provider. These third-party companies can offer different levels of service.
For example, a service provider may offer research services, preparation and filing services, or full outsourcing services.
Companies that prefer to prepare and file licenses themselves, may choose to use a research service to identify compliance gaps and any subsequent actions that would need to be taken. 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 the 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.
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.