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5 Critical Business Licenses and Why They Are Essential

You have conducted extensive market research, drafted your business plan, completed a variety of legal documents, and finalized your mission statement. Your business is ready to open and thrive—or is it? Entrepreneurism is, at its core, paperwork, and obtaining necessary licensure is a critical step on the path to business success.

Administered by federal, state, and local government entities, business licenses and permits oversee everything from your company's collection of sales taxes to your ability to manufacture or sell restricted products. Without appropriate licensure, your business runs the risk of heavy fines, lawsuits from disgruntled customers, or forced closure.

Business Operation License

First and foremost, your company should obtain a business operation license from the city or county in which you intend to operate. This license demonstrates your company's ability to operate within the bounds of local regulations. It may be a hassle to obtain, but this basic license is absolutely essential, as the consequences of operating your company without it could be steep. Some cities and states require all companies to obtain licensure, but exceptions exist in certain regions, such as Arizona.

Different cities use wildly different terminology to refer to standard business licenses. In Philadelphia, for example, these are known as activity licenses (and were previously called business privilege licenses).

Applying for a Business Operation License

The application process will depend largely on the community in which you choose to pursue licensure. You can obtain essential materials and an application form from your local city hall or county government office. Applications may also be available with your city's department of economic development. You may be required to submit a fee alongside your application. Additional required documentation may include multiple copies of your business plan, site plan, and building plan.

Licensure obligations unfortunately do not end after you have completed your initial business operation license. Most municipalities require renewal on an annual basis. Some local governments issue courtesy notices, while others expect businesses to pursue renewal without notification. A fee may be required for successful license renewal, which may not be considered filed until all fees are received.

Special or Occupational Business Licenses

In addition to obtaining a general business operation license, many cities require owners to apply for specific licenses based on their field or the type of products they sell. The goal of such licenses is to demonstrate that business owners are able to abide by the unique demands of their industry while complying with local safety and environmental regulations. Examples of specific business licenses or permits may include the following:

  • Animal-related licenses
  • Entertainment license
  • Firearms license
  • Hotel or motel license
  • On- or off-sale liquor license
  • Parking lot license
  • Pest control license

Occupational licensure is nearly always required for businesses selling or working with restricted products such as liquor, lottery tickets, tobacco, gasoline, or firearms. These types of businesses often require special inspections from local fire departments or law enforcement officials. As with general business licenses, occupational licenses generally require renewal on an annual or biannual basis. Renewal may be accompanied by a special fee or additional inspections, especially if the company has made notable operational changes since its initial application.

Applying for Special or Occupational Business Licenses

As with general business licenses, application for special licensure depends largely on your locality and the industry in which you intend to operate.

When in doubt, speak with your city or county clerk to ensure that you apply for the correct license and complete all necessary paperwork.

Federal Licenses and Permits

Many businesses require not only one or more of the special licenses outlined above, but also federal licensure. The Small Business Administration (SBA) mandates federal licenses for a variety of business activities regulated by federal agencies. The main business categories requiring federal licenses include the following:

  • Firearms and ammunition
  • Mining and drilling
  • Nuclear energy
  • Radio and television broadcasting
  • Alcoholic beverages
  • Aviation
  • Fish and wildlife
  • Commercial fisheries
  • Agriculture
  • Transportation and logistics involving oversized vehicles

Applying for Federal Licenses

As with state-based licenses, federal licenses can often be obtained online. They are issued through a variety of federal agencies. For example, a commercial farm looking to transport animals or animal products across state lines would obtain the necessary license through the United States Department of Agriculture. Likewise, businesses that manufacture or sell alcoholic beverages must seek licensure through the Alcohol and Tobacco Tax and Trade Bureau. The SBA's website provides a thorough overview of federal license categories, along with links to associated federal agencies and application resources.

Sales Tax License

Generally imposed by state and local governments, sales taxes are levied at the time of sale and collected by the retailer. Proceeds are then passed on to the state. A sales tax license recognizes your company's collection and remittance of required state taxes. Select states (including Montana, Oregon, Alaska, New Hampshire, and Delaware) do not assess sales taxes and therefore do not require this license. However, businesses based in sales tax-free states may still be required to obtain licensure for paying sales taxes in other regions.

Who Needs a Sales Tax License?

If your business sells tangible property to consumers, a sales tax license may prove necessary. Requirements vary somewhat from one state to the next; check with your state's treasury department to determine whether this particular license is needed for your business.

Generally, licensure is required for any sellers with 'sales tax nexus'—a legal term that refers to sufficient physical presence. This standard is used to determine whether largely out-of-state businesses need to collect sales taxes from buyers in a particular state. Nexus applies to any business with more than a slight physical presence. The qualifying company may store inventory in a particular state or have affiliates that act there on its behalf. Both types of involvement are more than sufficient to achieve sales tax nexus.

When to Obtain a Sales Tax License

A sales tax license is essential as soon as you determine that your business holds sales tax nexus. Although applying for this license could prove costly if done too early, a late application is far worse. It is tough to collect sales taxes from customers after the fact; if you take too long, expect a significant monetary burden as you repay back taxes.

The Process: Registering for a Sales Tax License

As with any license or permit, sales tax license registration varies from state to state. In general, however, you will want to gather essential information, such as your Employer Identification Number (EIN), before you proceed. Depending on rules in your state, you may also need access to the following:

  • Social Security Number
  • Standard Industrial Classification
  • Location and date of your company's incorporation
  • Information about your partners and suppliers

In most states, it is possible (and easy) to register for a sales tax license online. Typically, those who complete online applications can expect to receive their license within a few days, at most. In some states, sales tax licenses arrive almost immediately after completion of the online application.

Transaction Privilege Tax: Similar to Sales Tax

Not all states assess sales taxes, and in some states, taxes are imposed upon sellers rather than purchasers. For example, Arizona utilizes a transaction privilege tax, in which those with the 'privilege' of doing business pay accordingly. Although businesses can technically pass this expense on to consumers, they are ultimately liable to the state's government. Licensure for transaction privilege tax can be obtained through the Arizona Department of Revenue, which researches thoroughly to ensure that all businesses remain compliant with local transaction privilege tax requirements.

Occupancy License

Often referred to as an occupancy permit or certificate of occupancy (and not to be confused with aforementioned occupational business licenses), this essential license establishes that the intended location of your business complies with local zoning ordinances and is safe for its intended use. Depending on the locality, an occupancy permit may be required for the entire building (this is typically the case for buildings with one purpose, such as offices), or separate permits for every floor of the building or every establishment.

Applying for an Occupancy License

Depending on your company's intended location, you may be required to provide thorough proof of business, such as articles of confederation or your EIN. Additional documentation could include your legal commercial lease agreement, property deed, business dimensions, or detailed information about your company's operations. In some cities, clear proposals are required for any desired changes to an existing business space. Meetings with officials from local fire and building departments are common prior to occupancy approval.

To be approved for your occupancy permit or license, the building that houses your business must pass stringent inspection, which determines whether the space is fit for commercial use. Many cities require business owners to pay fees upon applying for occupancy.

Home Occupation License

A notable subset of the occupancy permit outlined above, home occupation licensure is crucial for small businesses that intend to operate out of residential locations. Examples could include home-based daycare centers, tax preparation services, or art studios. These and other businesses must obtain home occupation licenses, which prove that their houses are fit for doing business.

Many cities place strict limits on the types of businesses eligible for home occupation. For example, the city of St. Paul, Minnesota requires service and teaching occupations to serve just one person per employee at a time, rather than run group sessions or classes. Washington, D.C. allows for no more than eight visits to the company's home-based premises by visitors, suppliers, clients, or customers. It is important to familiarize yourself with local requirements, as these may prompt you to rethink your status as a home-based business.

Determining the Right Licenses and Permits for Your Company

No matter your industry or intended business location, it is imperative that you do your research and obtain necessary licenses and permits before you embark on your entrepreneurial adventure. As with completing legal documents to start your business, this is a crucial aspect of building a business. Unfortunately, there is no one clear path for getting up to speed with licensure.

The process of securing necessary licenses and permits will depend largely on requirements in your state and industry. When in doubt, arrange to meet with your city or county clerk who can provide in-depth insight into local requirements and instructions for the license application process. At a minimum, expect to obtain a general business license and either an occupancy or home occupation license. A sales tax license will likely prove necessary if you operate in a state that assesses sales taxes.