Business Licensing – Covering Your Bases

Starting a business requires much more than simply hanging out your “open” sign. Not only do you have a plethora of decisions to make, but you will also need to clear all the federal, state and local licensing and regulatory requirements. From the time you create a new entity until you open your business and beyond, you need to expect a significant investment of time and expense in meeting various governmental requirements.

This article will discuss some of the more common filing and licensing requirements for new businesses.

Federal Requirements

When forming a new business entity (corporation, limited liability company, partnership), the Internal Revenue Service will require you to establish an Employer Identification Number (EIN). This number, assigned by the Internal Revenue Service, will be used by your bank, your vendors and your customers in fulfilling their reporting requirements with the IRS. If you have employees, this is how the IRS tracks your compliance with withholding and payroll tax requirements along with properly reporting employee wages. It is, of course, also the number the IRS uses to make sure your business properly files its income tax reports. Under the USA Patriot Act, as well as other banking laws, your bank will also require the company’s EIN. You can obtain an EIN at the IRS website.

Depending on the industry in which you will operate and the number of people you employ, the federal government may also require other licensing or registration requirements. Check with industry associations and others who are in the business you plan to enter to determine what licensing and permitting you will need.

State Requirements

Every state has its own unique business licensing requirements. At a minimum, you will find each state requires licensing for various professional occupations. Businesses that deal with health care, food services, real estate, construction and a multitude of others typically require some form of licensing. As a starting point, The United States Small Business Administration provides a list of state licensing contacts.

In addition to professional and occupational licenses, you will also need to register for income tax, sales tax and employment tax purposes. Some states piggyback off of the Federal EIN, but many have their own unique identification numbers for employment tax purposes and certainly for sales tax purposes. Even if you will not be collecting sales tax from customers, if you purchase anything inside of your state or import any taxable goods from out-of-state, you might owe use taxes, which are, for all intents and purposes, the equivalent of sales taxes.

Local Requirements

Business license requirements at the local level tend to revolve around sales and use taxes, occupational licensing and occupancy permits. Typically, local zoning boards also control where you can place a business.

Many localities require both a certificate of occupancy and business license. The certificate of occupancy basically says that you are permitted to conduct business at a certain location and that location is suitable for occupancy. Much of the time, business licenses cannot be issued until the certificate of occupancy is issued. A certificate of occupancy is typically a one-time cost, unless you make major renovations, and not very expensive. On the other hand, business licenses can be expensive as the fee is often based on company sales.

It is critical your business location is zoned properly. For example, if you want to open an accounting office inside your home and receive clients there, you need to make sure your property is zoned for commercial use. If not, and the neighbors complain, you may be forced to move. While this simple case would be expensive, it would be worse if you built an auto shop only to find out that your property was zoned only for churches. You could be forced to leave a brand new building and start somewhere else.

The Cost of Non-compliance

As many people have found to their chagrin, it’s generally less hassle and less expensive to comply with the law than it is to pay penalties and interest after the fact. Penalties for violating licensing requirements can be anywhere from a few dollars to literally losing your business. If you are in the process of establishing a new venture, give us a call. We will be glad to help you determine your licensing requirements.

Have a terrific month!

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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