What Sole Proprietors Need to Know About Business Licenses

What sole proprietors need to know about business licenses

Freelancers and solopreneurs choose to run sole proprietorships for many reasons. They’re effortless to form and have minimal costs. But because a sole proprietorship is so uncomplicated, you may be lulled into complacency about business-related rules and regulations. 

Some sole proprietors assume they’re exempt from business license restrictions because they run a one-person operation or work online. This assumption is inaccurate and can lead to legal issues down the line.

“If you hope to grow your business in the future, you’ll want to make sure your business is properly licensed from the start,” said Zane Johnson, founder of MZA Legal. “Even if you fly under the radar initially, when it comes to taking on new opportunities (e.g., partnering with a larger company or joining a business accelerator program) they often require that your business be properly licensed. Additionally, you may be subject to fines, penalties or interest when you do finally register your business. So it’s important to properly license your business from the start.”

Here are some crucial things for sole proprietors to know about business licenses. 

1. Sole proprietors may be required to obtain a business license. 

Sole proprietors are responsible for finding out if they need a business license. “For most solopreneurs the issue is figuring out what their licensing requirements are,” said Johnson. “So the advice I always give is to lean on the business resources offered in your city, region or state. Industry associations, and mentors can be a great source of advice because they’ve been in your shoes before. And not only do they know the steps towards properly licensing your business, but they also know little tips and tricks to help speed the process up.”

Johnson also suggests reaching out to nonprofits that assist small businesses, such as SCORE, or your local or state elected officials “to help you navigate the confusing world of business licensing.”

Federal, state, county and city governments issue business licenses. Even if the federal government doesn’t require you to get a business license, your state, county or city may have its own requirements. You will likely be required to get at least one business license or permit between federal, state, county and city requirements.

Generally speaking, regulated businesses are more likely to need business licenses at the federal and state levels. For example, if you make jewelry and sell it at festivals, you are less likely to need a state business license than if you open a restaurant. There’s little potential harm if a customer’s jewelry breaks prematurely. It’s much more severe if a restaurant has a food poisoning incident because it didn’t follow food-handling rules. 

If a federal agency, commission, association or board regulates your industry, you’ll need a federal certificate in addition to a business license. These industries include:

• Television and radio broadcasting
• Fish and wildlife
• Agriculture
• Nuclear energy
• Transportation and logistics
• Aviation
• Firearms, ammunition and explosives
• Mining and drilling
• Commercial fishing
• Alcoholic beverages
• Maritime transportation

Sole proprietors should check federal, state, county and city requirements for licenses and permits.

2. There are different types of business licenses.

Sole proprietors may need various licenses to operate legally. Some of these licenses include the following:

• Operational licenses: Most sole proprietors need an operational license at a minimum. This license is often required if the sole proprietor has a taxpayer identification number. In some instances, sole proprietors must maintain a state-issued license in addition to a general license if the government regulates its activities. You can get an operational license from the city or county where you conduct business.
• Occupational licenses: Sole proprietors involved in a trade or profession require an occupational license. This license ensures the proprietor has the legal authority to provide a particular service. Some examples of businesses that need an occupational license are tattoo shops, massage therapists, dietitians and childcare. These licenses can be obtained from state departments.
• Federal licenses: Sole proprietorships in federally regulated sectors require federal business licenses. Services such as ground transportation, investment advising and manufacturing firearms are federally regulated.
• State licenses: You must apply for a state license if you’re selling products or services regulated by the state. There are specialized state licenses for mechanics, lawyers, barbers, building contractors and more. Construction companies may need a state license. Additionally, businesses that must comply with state regulations, such as restaurants, also need a state license.
• Permits: Sole proprietors may also need various permits to operate. For example, they may need permits from the health department if they’re involved in the sale or preparation of food. If you have a home-based business, you may need land and zoning permits. You may also need a fire permit (if you are dealing with flammable materials) or an environmental permit (for businesses that may cause environmental pollution), among others.
• Sales tax permits/licenses: Most states require a sales tax permit or license for most retail businesses. This means you may need a sales tax license to legally charge sales tax to your customers. If your county or city charges an additional sales tax, you may also need a local sales tax permit.
• Local licenses: Most businesses must obtain a local license. Local licenses often carry the smallest fees and are the easiest to obtain.
• Professional licenses: If you are a lawyer, accountant or one of certain types of financial advisors, you will need a professional license. Other professions such as cosmeticians, makeup artists and pest control also require professional licenses.

3. You need to understand where to apply for licenses and permits.

When it comes to business licenses, location matters. For example, if you live in an unincorporated area of a county, you will likely apply for a business license through the county instead of a city. If you work in a city, you’ll need to check the city’s website to see if it requires businesses to obtain permits.

When applying for licenses and permits, sole proprietors should work from the top down: 

• Federal: Determine if your business is federally regulated and what that entails. 
• State: Visit your state’s Secretary of State, commerce department or professional regulation website to determine your state requirements. 
• County: Visit your county’s website to determine what’s required at the county level. 
• City: Visit your city government’s website to ascertain the permits and licenses it requires. 

4. If you are doing business in a name other than your own personal legal name, you will need to file a DBA. 

DBA stands for “doing business as” and is necessary when you are doing business under a brand name. This way, when you market your business, it will sound like a business rather than an individual. Unlike corporations and LLCs, a DBA does not create a separate legal entity and will not shield you from liability.

Contact your state to find out how to file for a DBA and how much it will cost in fees. Generally speaking, DBA fees range from $10 to $100. You will need to ensure that there are no other businesses or sole proprietorships already operating in that state with that name. Since it will not be a corporation or LLC, you cannot append Inc., Corp., Company or LLC to the end of the name.

Once you have set up the DBA, you can open a bank account in that name, receive payments in the name and market your products or services under it.

5. You may also need a sales tax license.

Most states and some counties and municipalities collect sales tax on goods and services sold there. A sales tax license will give you the right to sell goods and services and to collect the sales tax amount due for each sale. You are then required to pay the sales tax to the taxing authority on a monthly or quarterly basis.

6. You will need to know the terms of your business licenses and permits.

Different business licenses have specific renewal requirements. Some business licenses need to be obtained only once and are good for the life of the company, while others need to be renewed annually or less frequently. If you let your business license lapse, you could face penalties such as fines. Find out how long each license and permit lasts, pay attention to renewal notices and stay on top of keeping them current. 

Lauren Morgan, attorney and founder at Activated Law, cautions, “Failing to comply with licensing requirements can result in fines or interruptions in business operations. Sole proprietors must understand and meet these requirements to avoid potential legal issues.”

Sole proprietors are part of the business world

It may be tempting to think your operation doesn’t need licenses and permits because you work from home. Federal, state and local governments will notice eventually. Tax revenue is critical for your community, and you could be subject to penalties for time spent operating without a license.

The freedom of running a sole proprietorship is wonderful, but it’s worth remembering that you’re still part of the business world, and it has some rules for you to follow.