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)
- Debt Management and Collection
- Financial services
- Firearms and Explosives
- Hazardous materials
- Mining and Oil/Gas
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)
- 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.