Why It Is Essential To Get a Business License


Receipt Cat Staff

posted on

October 13, 2022

Small business owners want to ensure that their operations are legal from the beginning. But, it is possible that you may not know what legal obligations you have. This article will explain how to obtain a U.S. business license and why it is important.

What Is a Business License?

A business license is the government's authorization to do business legally at the local, state, or federal levels. The type of license required depends on the nature and location of the business entity applying for it.

A license certifies that your business complies with the laws and regulations of the jurisdiction where you are operating and that you have the skills and knowledge to perform the work.

Although specific requirements will vary depending on where you are conducting your business, most jurisdictions require you to get a general business license before you can start operations. There may also be additional documents required for specific activities.

Why Is a Business License Required?

Business licenses are the most basic form of government licensing. They allow the government to keep track of registered companies and is also a way to protect public safety.

This means that a licensed company can easily be monitored for compliance with safety and health regulations and held responsible if they are violated.

Business licenses allow you to track cash flow as well as the taxes that result. Similar to business licenses, local governments also issue licenses for revenue generation within their jurisdictions.

Important to remember that getting a business license is just one of the legal requirements required before you can start your venture.

The First Step Is To Register Your Business

You must register your business with the state before you can do any other things. This step is the legal foundation for all other steps.

There are many ways to structure your company. Each has its own merits and drawbacks. We'll be focusing on two of the more popular options for small-business owners.

Sole Proprietorship

A sole proprietorship is the most straightforward way to form a new company. This allows you to run your business in your own name without the need for a separate entity.

  • You have full control over your business as a sole proprietor
  • All profits go directly into your pockets
  • Take advantage of the simplified paperwork
  • You are free to restructure the company however you like

This approach has one major drawback: you become your business. You are the only one responsible if your company has to go bankrupt or faces legal problems. Your personal assets are also subject to this liability.

Limited Liability Company (LLC)

Although it is more complicated than the other options, an LLC is a good choice if your goal is to open a larger business and invite others into the company.

An LLC provides members with additional legal and financial protection, which separates company and personal assets. If an LLC is sued or has financial difficulties, it will be responsible for your damages and not yours.

An LLC is a great option, but you need to remember that the startup and operating costs will be more expensive than if it were a sole proprietorship. You will also need to pay self-employment taxes unless you are taxed as an entity.

Additionally, there will be stricter record-keeping requirements. Learn more about LLC Taxation at the FreshBooks Learning Hub.

What’s a DBA?

A DBA is a "Doing Business As" (DBA) declaration which is an alternative name for your company. For example, if you are a sole proprietor but do not want your company to bear your name.

This requirement applies to LLCs that want to operate under a different name in order for consumers and avoid confusion.

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How Do I Get a Business License?

Registering a business to get a license depends on the area in which you live. The best place to start is to visit your state’s government website which will point you in the right direction.

What Are the Types of Business Licenses?

No matter if you work from home or operate a store/office, you'll need the authorization to carry out legal business. Likely an individual working from home with workers is much more controlled than a web developer who works for a freelance company.

Here's a brief overview of the possibilities of licenses you may require:

General Business License

A majority of businesses will need to obtain a basic business permit. This is an annual license granted by the local municipality or county, which allows you to legally operate a company in the local area.

Professional License

Certain professionals, like plumbers, contractors or accountants, may require a license to prove their expertise. When you're a freelance writer, designer, software developer, or consultant, don't require a professional license.

Sales Tax License

You need a sales tax license from your state if you live there and intend to sell products subject to sales tax (if your company sells tax-exempt products as well as services). Contact the state revenue officer to find out if the services you offer are being considered "taxable" and if they are not. In general, this is the case for retail sales of products; however, some services related to labor might also be tax deductible.

Specialty Permits

In addition to the business licenses, you'll require business permits to regulate aspects like business activities in areas of residence as well as fire safety and the use of land, to mention just a few.

You don't want your next-door neighbor selling chemicals that are dangerous. Regulations and permits for zoning stop the possibility of such incidents from occurring.

Speciality permits include:

  • Home Occupation Permits: In certain areas, you'll have to be granted a permit to run any home-based company, even if it's simply running a blog on your personal computer. It is possible to check with the city or county planning department to determine whether it's required.
  • Health Permit: Health permits are required if your company involves selling products used by humans (e.g., a food service provider) or are in contact with people's bodies (e.g., nail salons). If you're a nail salon, then you'll require authorization from your county or city and an annual health inspection. Some examples of these include food trucks, restaurants, market vendors on the streets, wholesale food producers, as well as tattoo parlors and beauty salons.
  • Fire Permit: If you have a public space that is open to the public or if you want to utilize any flammable materials, you must get the fire department's approval.
  • Signage Permit: For a few areas, you'll need to obtain a permit from the county or city Zoning department prior to being able to install a sign to advertise your company.
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What If I Do Not Have a Business License?

If you do not obtain the required permissions or do not renew your license, you may suffer penalties that could affect your finances, lead to legal action, or harm your reputation.

When a corporation introduces a fresh new product or service to its offerings, it may be unable to comply with licensing rules. To avoid this, be sure you speak with a chartered professional accountant (CPA) prior to altering your business structure.

The consequences when operating a business without a license could range from fines and penalties imposed by authorities all the way to the closure of a business.

Fines or Penalties

The most basic consequence of operating an enterprise without a license could be a penalty or fine that is imposed on your business by state, city or national authorities.

Some jurisdictions may impose the same fee in the event of operating without an approved license; other jurisdictions will calculate it based on the amount of revenue generated by your company. In either case, you must ensure that you pay your licensing costs prior to engaging in business-related activities.

Legal Repercussions

Alongside the financial consequences in the event of operating without the proper business license may cause legal problems like lawsuits or being arrested.

Vendors and customers who interact with your company are expecting your company to be legally operating. If news spreads out that you've provided services that don't meet the requirements for licenses or qualifications, Business partners might decide to seek legal action to recover the cost of damages or a damaged reputation.

Business Closure or Temporary Shutdown

If you do not get the necessary licenses promptly, authorities may decide to close your business or even confiscate equipment right on the spot.

A temporary shutdown of your business might not mean all that's needed to end your business; however, it will certainly affect the flow of cash. In the long term, it can bring bad media coverage and harm the customer base of your business.


You should get your licenses in the shortest time possible If your business is operating. Before opening your doors to customers or accepting payments for your business, you must file the necessary documentation.

The process of getting your permits and registration to be in order is simple. Making sure you have the permits at the beginning is far less complicated than paying large penalties (or maybe even having your company closed) when you're discovered operating without the appropriate documents.

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This post is for informational uses only and is not legal, business, or tax advice. Please consult with an attorney, business advisor, or accountant with concepts and ideas referenced in this post. Receipt Cat assumes no liability for actions taken in reliance upon the information contained in this article.

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