Business Licenses and Permits: What You Need to Know

A license is a document demonstrating that a company has received official approval to conduct an activity that requires consent or authorization from a governing body. A person who is a professional, such as a real estate agent or therapist, may have to take a test in order to be granted the license.

Permits typically provide documentation that a building or organization has passed a safety inspection of some kind. For example, a fire inspector must determine whether a building meets fire codes at the federal, state and local level.

Since there are so many potentially relevant documents necessary, it is extremely important for a business owner to do thorough research on the ones that are applicable to the individual company.

Federal Requirements

Other than the Employer Identification Number, which applies to almost every type of business, a company may not need another license or permit from the federal government. This should be verified to prevent issues, as there are federal regulatory agencies that investigate and enforce business requirements. For example, the Bureau of Alcohol, Tobacco, Firearms, and Explosives oversees companies that sell these items. Similarly, the Food and Drug Administration is responsible for monitoring the actions and/or products of companies that manufacture foods, medications and medical devices, among others.

State Requirements

State governments are responsible for setting the license and permit requirements necessary within their borders, and they differ significantly from one state to the next. First, the owner of a company should be prepared to acquire a state business license. This is one way that states provide oversight for the protection of consumers. It is also key to keeping records for tax purposes, particularly in the case of states with income tax. A sales tax license may be necessary as well.

When the business is selling products or services, there may be state licenses or permits specific to those items as well as licenses or permits mandated by federal agencies. Gasoline, liquor and guns are examples of such products, while professionals such as accountants, doctors and cosmetologists may also need to be licensed or obtain permits for their place of business. Many states require a permit from the health department, particularly for industries that produce food.

Local Requirements

Zoning laws in cities and counties regulate what kind of activities and transactions can be undertaken at a location. Some types of businesses may not be allowed in certain areas. For example, an area may be zoned for residential use, so a commercial enterprise may not be able to conduct business on that lot unless the company is able to get it rezoned. Property use and building safety permits and occupancy certificates are often part of compliance with zoning laws.

When an existing company is for sale, the potential buyer will need to check with local agencies to determine whether the conditions for existing licenses and permits are met. If the laws have changed since its founding, the company may have been “grandfathered in,” and the new owner will have to update the documentation based on the new laws.

Online Business Requirements

A company that sells products strictly online has many of the same requirements as the business on a physical lot. Even though the items are not sold in a store, they may still be subject to sales tax, so the business owner may need to get a sales tax license. Items regulated by a specific government agency will probably have the same rules, so the company should check with the appropriate officials to determine if there are licenses or permits needed.

States differ in the way online sales are regulated, so learning the relevant compliance issues is still part of the process. Permits related to location may apply as well. In fact, home-based businesses may require unique registrations and paperwork.

License and Permit Information Sources

The number of federal, state and local agencies that may be involved in regulation and oversight of a company may seem overwhelming. Fortunately, there are many resources available to help new business owners make sense of the tangle.

Local agencies will probably have much of the essential information, including applications and forms, to get a company started down the right path. For example, the chamber of commerce, a local trade association, department of buildings, county clerk’s office and others may provide excellent resources. Government agencies such as the Internal Revenue Service and the Small Business Administration provide detailed instructions for new business owners as well.

Failure to comply could lead to violations, citations, fees, litigation and even closure. Business owners should attempt to learn the basics, or seek expert assistance, before opening the doors for business.