Every business needs a business license, but licensing requirements vary by industry, location, and business activities.
This guide walks through the steps needed to identify and obtain the licenses your business needs.
What is a Business License?
A business license is a license or permit issued by your state or local government that allows your business to operate, including for specific activities. Some licenses need you to get certified to prove you understand the related rules and regulations. Other licenses are easier to obtain and only require registration.
Here are some important points to understand about business licenses:
- A business license does not form a business: If you're starting a business and forming an entity like a corporation, LLC, or limited partnership, you'll need to file paperwork with the state and obtain necessary licenses and permits. However, for unincorporated structures, like sole proprietorships or general partnerships, no formal paperwork is required to start, but you may still need certain licenses or permits to operate legally.
- A business license is not a DBA: A “doing business as” (DBA) registration allows you to operate under a specific business name, but it does not replace the need for necessary business licenses and permits to operate legally.
- What licenses does your business need? Business license requirements depend on the type of business, where it operates, and what activities it does. You might need licenses or permits from federal, state, or local authorities.
Most businesses must register with the state department of revenue and get a sales tax permit. You will likely need a general business license, also known as a business privilege license, business tax registration, or basic business license. This license is usually issued by your city or county.
Furthermore, three states require a general business license at the state level: Nevada, Alaska, and Washington.
Failure to comply with licensing rules may result in fines, penalties, business closure, or criminal charges.
Steps for Getting a Business License
Before you apply for a business license, complete a few steps first. Most of these steps also apply if you are expanding your business into other states.
1. Research Licensing Requirements
To start, research the licenses and permits your business needs. Different authorities at federal, state, and local levels have varying requirements, so consult multiple offices. Most licensing rules are at the state and local levels.
Licensing rules vary by state, city, and county. For example, some states require general contractor licenses at both state and local levels, while others only require one. If you plan to open businesses in different cities within the same state, verify the licensing requirements for each area.
Additionally, check with your local zoning office. Some cities limit or ban certain types of business activity, which may decide where or if you can open a location.
2. Register Your Business Entity
If you plan to form an LLC or corporation, or register your business in a new state, do so before applying for any licenses or permits. Licenses are issued under your business's legal name. For domestic LLCs and corporations, this is the name on your formation documents. For businesses from another state, it's the name on your application to do business in the state.
If you apply for a business license under your personal name before forming your LLC or corporation, you will be treated as a sole proprietorship. Many places do not allow you to transfer licenses between different businesses, so you might need to reapply for your licenses once your entity is set up.
3. Get an EIN
An Employer Identification Number (EIN) is a federal tax ID given by the IRS. It works like a Social Security number for your business. You need an EIN to file federal taxes, open a business bank account, and pay employees.
Below are the requirements by incorporation type:
- Multi-owner LLC, a corporation, or a partnership: You must have an EIN, even if you don’t have workers.
- Single-member LLC (meaning you are the only owner): An EIN is not required unless you have employees or need to file excise tax returns.
However, you might still need an EIN to open a bank account for your LLC. Additionally, some companies will ask for an EIN before paying your business.
4. Register with the Department of Revenue
You may need to get a tax ID from your state’s Department of Revenue. This requirement depends on whether you must pay state taxes. Sometimes, you can use a state tax ID for other purposes such as protecting yourself against identity theft if you are a sole proprietor.
To find out whether you need a state tax ID, check your state’s laws on income and employment taxes – two of the most common types of state taxes for small businesses.
Getting a state tax ID number is similar to getting a federal tax ID number, but the steps can differ by state. Be sure to check with your state government for the exact process.
5. Obtain a DBA
If you have a sole proprietorship, you need a DBA (also known as an assumed name, fictitious business name, or trade name) to use a name other than your own. For LLCs and corporations, a DBA is required if you want to use a name different from what's on your formation documents.
You can apply for a DBA at either the state or county clerk’s office, depending on your location, and some states may require publication in a local newspaper. A DBA is not needed if you use your legal business name.
6. Apply for State Licenses
Many business activities need a license from the state.
If you want to sell taxable products or services, most states require a sales tax permit from the Department of Revenue or the state tax department. This permit allows your business to collect and pay sales tax.
States also closely regulate some industries to keep the public safe, including construction, childcare, and real estate.
In some industries, both the business and the individual worker need separate licenses. For example, in real estate, both the brokerage and the agent must be licensed.
To obtain a license, you may need to pass a test, have experience, or maintain minimum insurance.
Before applying, research the specific licensing requirements for each state where your business operates, as they can differ widely.
7. Apply for Local Licenses and Permits
Check with your local government offices to find out the specific requirements and fees for your business, as these can vary by city and county. Typically, you will need the following before you can operate:
- General business license: Most jurisdictions require a general business license to operate. If you have more than one location, you will likely need a separate license for each, even if they are in the same state.
- Zoning approval and certificate of occupancy: Location dependent.
- Health and safety permits: Such as food permits for restaurants, alarm permits, or signage permits.
8. Maintain Business License Compliance
Licenses and permits require regular renewal, with the period varying by type, location, and industry. Keep track of expiration dates to avoid fines or penalties for operating with an expired license. Some renewals may need proof of continuing education or updated certifications.
If your business changes, check your licenses and permits to see if you need to update or file new ones. Common triggers include:
- Changing your business name or principal business address
- Adding a new product or service
- Expanding into a new state or city
If you hire employees, you may need to get extra licenses. You must also register with state and local agencies for payroll taxes.
Choose someone in your business to keep track of license and permit deadlines and handle renewals. If your business has multiple locations and licenses, think about using a business license service provider.
Where Do You Get a Business License?
Where you get a license depends on the type of license and which level of government issues it.
If your business works in areas regulated by federal agencies, you will need federal registration, permits, or licenses. Examples include securities broker-dealer (from the SEC), a food processor or manufacturer (with the FDA), or if your business buys or sells more than 2,000 pounds of fresh fruit or vegetables (with a USDA PACA license).
State licenses and permits can be obtained through a state agency or licensing board. These include:
- Sales tax registration and permits: Generally handled by the Department of Revenue or state tax department.
- Payroll tax registration: Often split between departments. In some states, income tax withholding is handled by the Department of Revenue, while unemployment insurance is handled by the Department of Labor.
- Professional and occupational licenses: Usually issued by a state licensing board specific to your industry.
Local licenses and permits are obtained from your city, county, or municipal office, often through the county clerk or business licensing department.
How Much Does a Business License Cost?
Federal licenses and permits vary in cost based on the agency and type of registration, with some free and others costing hundreds or thousands of dollars.
State license fees vary by state and license type.
- Sales tax permit: Ranges from $0 to $100.
- Professional and occupational licenses: Range from $50 to $600 for application fees alone.
- Some licenses may have extra costs. These can include fees for certification, background checks, and required insurance or bonding.
Local license fees are usually low, but they can differ by city and county. Some local governments set fees based on your business's gross revenue or the number of employees, instead of using a flat rate.
Besides the initial application fee, remember to consider the cost of renewals, which most licenses and permits need periodically.
When Do You Need a Business License?
Before you start your business, you usually need a business license. Most businesses, no matter their size or type, require at least one license or permit to operate legally. This includes home-based and online businesses.
If you work in certain professions, you must get specific licenses or certifications before you can start your job in that field