Business Licenses 101: Who Needs One and How to Apply

In order to operate your business legally, you may need a business license.
Last updated May 7, 2020 | By Miranda Marquit
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Many people dream of starting a business and making enough money to live the life they want. However, when starting a business, it’s easy to get caught up in the excitement of creating plans and making a profit. What often gets lost in the shuffle is all the paperwork and legal stuff you have to take care of.

Depending on your business and where you’re located, you might need to know how to apply for a business license. If you’re trying to determine whether you need a business license, here are some things to keep in mind.

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Do I need a business license?

The first question you need to ask yourself is, “Do I need a business license?” The answer to this question depends largely on the type of business you plan to operate. There are different requirements at the federal level, as well as at the state and local levels. The fees you pay and the application process depends on where you live and how you operate, so it’s important to understand the various levels of government involved.

Federal business licenses

Most businesses don’t need to obtain a federal business license in order to operate. However, if you’re planning to run a business that’s regulated by a federal agency, you might need to find out if there are specific requirements you need to follow in order to register your business and operate legally. Some of the types of businesses that might require federal licensing or permitting include:

  • Providing ground transportation (not as a rideshare operator): If you plan to provide airport shuttle services or operate a mass transit business in an area, you might need to contact the Department of Transportation.
  • Selling alcohol, tobacco or firearms: As you might expect, if you want to open a liquor store or a tobacco shop, or sell guns, you need to register with the Bureau of Alcohol, Tobacco, Firearms and Explosives.
  • Offering investment advising services: If you plan to help others invest their money, you probably need to register with the Securities and Exchange Commission.
  • Broadcasting: Whether you’re doing it for TV or radio, you likely need to register with the Federal Communications Commission. This mainly applies to using the airwaves, and not online publishing activities, including podcasts.
  • Preparing meat products: You might need to meet requirements set forth by the Food and Drug Administration if you plan to produce and prepare meat products and certain other food products.
  • Manufacturing drugs: Interested in developing the next miracle drug? Any business that involves creating and/or manufacturing drugs needs to be overseen by the Food and Drug Administration.

While you might not need a federal business license or permit for your business, it can make sense to get an Employer Identification Number (EIN) from the IRS. If you plan to file business taxes, you need an EIN. Even if you don’t have employees yet, you might also need to get an EIN. Check the IRS website for more information on when to file for an EIN.

State business licenses

The question, “Do I need a business license?” also applies at the state level. As you might expect, which businesses need licenses depends largely on the state. Many states require licenses for professional business owners, like accountants, lawyers, and doctors. Additionally, if you do something that involves building-related trades, like plumbing, HVAC installation or electrical work, you might need a state license.

Liquor sales, restaurants, cosmetology, and other establishments may also require business licensing and permits as well. You can check with your state’s business resources or Secretary of State office to find out if your business requires licensing.

Even if you don’t need a special license or permit, you may still need to register your business. For example, I live in Idaho. I’ve registered my freelancing business as an LLC, and each year I have to file an annual report and update information about the business. However, because of the nature of my business — providing freelance writing services — I don’t have to get any special permits or licenses. Even in my city, I’m not required to get a business license to run my home business.

However, if I started a business that collects sales taxes, or if I hired a W-2 employee, the situation would change and I would need to meet other requirements.

Local business licenses

Another consideration is that many cities require business licenses. There are stories every summer about kids’ lemonade stands getting shut down — and during the winter even hot cocoa stands can be targeted. In some cases, you might even need a license or permit to operate a home business.

Check with your city or county clerk to find out what types of business licenses are required. You may also need to adhere to zoning requirements, depending on your business. For example, if you plan to open a retail store, make sure that you’re in an area zoned for that type of business activity.

The reality is that most businesses are regulated at the state and local level, so there aren’t uniform standards you can just follow. Check with the appropriate state and local authorities to make sure you’re following regulations and submitting all the proper paperwork.

5 helpful tips for starting your business

Register your business

One way to start on the right foot is to register your business with the IRS (get an EIN) and with your state. I found it easier to get a business bank account and even filling out a business card application after getting an EIN and registering with my state as an LLC.

It’s also worth noting that with a sole proprietorship, your business and personal assets are considered the same thing. Registering your business as an LLC or S Corp. may protect your personal assets if your business runs into financial trouble.

Find out what paperwork is needed for your business

Research local and state requirements for your business. For example, I recently decided to set up payroll for my business, even though I’m the only person involved. Because I want a company to automatically withhold my taxes and make quarterly payments, I had to fill out extra paperwork with my state’s tax commission. Do the research ahead of time to make sure you’re doing what’s required of you.

Create a business plan

One way to organize your thoughts and move forward in an orderly fashion is to create a business plan. Your business plan should include information about:

  • Your concept
  • What niche or need it fulfills
  • How you plan to profit
  • Pricing strategy
  • Marketing strategies you plan to use
  • Analysis of the competition
  • Analysis of potential challenges and weaknesses (and how to overcome them)

There are different ways to write a business plan, but at the very least, it’s a good idea to get a timeline on paper and think through the steps you need to follow in order to get your business up and running — and earning a profit.

Separate your business and personal finances

Even if you decide to stick with a sole proprietorship at first, it’s still a good idea to separate your business and personal finances. This can make it easier to identify business costs that you can deduct on your taxes. It can also help you down the line if you decide to change your business organization to an LLC or S Corp.

Getting a business credit card can be one way to keep your finances separate. Plus, you can earn some valuable rewards that you can use to offset business costs. Here are some top small business credit cards with generous cashback rewards and other perks:

Carefully consider your needs to determine which card might be a good choice for you. Plenty of small business credit cards are easy to get and can help you reach your goals and manage your business finances separately.

Devote time and energy to your business

If you want to grow your business over time, you need to treat it like — well, a business. Once I began devoting time and energy to my own business, I was amazed at the results. By looking at my business in a new way after I started experiencing some success, I was able to make changes that resulted in bigger growth.

Depending on where you’re at in your business development, this might mean blocking out time to work on your business, reinvesting your profits into more marketing, or even hiring contractors or employees to help you with certain tasks. For instance, contracting a VA to help me with social media posts and other tasks freed me up to focus on big-picture business items that have really helped me take things to the next level.

The final word on business licenses

There is no easy, standard way to answer the question, “Do I need a business license?” However, if you head to your local and state government websites, you can get information on how to apply for a business license — and discover if one is even necessary for the type of business you plan to start.

While it’s tempting to just jump in and start going for it, the reality is that it’s important to have an idea of what’s required of you before you start. By doing your due diligence, you can protect the business you’ve built and give yourself some valuable peace of mind.

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Benefits

  • 1% cash back on every business purchase
  • Protection on eligible items within 90 days of purchase
  • No annual fee