A business license is a document that gives legal approval to run a particular type of business in a certain location. Business licenses can come from federal, state, or local governments—and in some cases, your business may need licenses from all three entities.
In this article, you’ll learn more about what business licenses are; the different types of licenses and permits; what professions require licenses or permits; and whether or not you need one or more of them.
What Is a Business License?
A business license is a document that states you have met the requirements to run a particular type of business in your country, state, and/or municipality.
Rules about business licenses vary from state to state and even from town to town. While there are some types of businesses in certain locations that don’t need any type of license, chances are your business will need at least one license to operate legally.
In addition to one or more business licenses, you also may need permits. Permits are essentially licenses for specific types of businesses that have a potential impact on public health—for example, businesses that serve food or provide personal services such as skin care or massage. Depending on the type of business you’re opening and the location in which you’re doing business, you may need multiple licenses and permits. In some cases, you can simply apply for a license or permit; in other cases, you must pass a test to qualify.
How Business Licenses Work
As an example of how business licenses work, let’s say you’re planning to open a restaurant and bar on Main Street in a California town. Before you open your business, you’ll need to get an employer identification number (EIN)—basically a Social Security number for your business— then register your business with the state. In addition, here are some of the licenses and permits you’ll need:
- Alcohol license from the state of California
- Food certifications of various sorts for food handler and bartenders from the state of California
- Local business license from your town
- A state tax permit from California
- Health permit from the county environmental health department
- Fire permit from your local fire department (to prove you’re up to code)
Types of Business Licenses
Some businesses require only the most basic licenses to do business. For example, if you’re running a one-person, in-home business making crafts, you may only need a general business license (or, in some cases, no license at all).
However, as soon as you open a storefront, hire employees, import products or foods from other states or countries, sell alcohol or firearms, or offer a service that requires specific training, you need to think about licenses and permits. It can be tricky to know exactly which ones you’ll need in your specific situation, so it can be worth your while to consult a business lawyer before opening your doors.
Federal, state, and local governments all require both licenses and permits for most businesses. Many of these can simply be purchased after filling in the right paperwork. Others require inspections or even tests.
Federal, State, and Local Licenses
The federal government requires most businesses to have an EIN. Beyond that, many types of businesses require federal licensing to get started. Examples include:
- Preparation of meat, eggs, and other foods
- Radio and television broadcasting
Each state has its own set of licensing requirements, and you’ll need to do the research to determine what your state expects. You can do so by going to your state’s Chamber of Commerce or using the Small Business Administration (SBA) to search for the best places to start your business. Not only can you find out where licensing and taxes are most advantageous, but may find special incentives for small business owners.
Once you’ve chosen the state in which your business will be based, start looking at the licensing and permitting requirements in individual municipalities—and even locations within municipalities. You may save money on licensing just by moving over a town line.
Licenses Based on Tests
Using the bar/restaurant example again, even after you’ve purchased all your licenses and had your bar inspected by the health and fire departments, you’re still not ready to start serving food and drinks. That’s because anyone preparing food must pass a licensing test, and the same goes for bartenders. There are quite a few professions that require licenses based on state-level tests, including:
- Real estate brokers
Permits are licenses that generally relate to the space in which you’re doing business. For example, if you’re building a structure, you’ll need zoning permits and various types of building permits depending on your location. If you’re opening a restaurant or personal care business, you’ll need permits from local health and fire officials. Examples of other permits you may need include:
- Sign permit (some towns have very strict rules about signage)
- Environmental permit if your business will be producing or processing anything that could have an impact on the local air or water
- Permits for selling products such as gasoline or lottery tickets
Do You Need a Business License?
There are some businesses, such as sole proprietorships, that are less likely to need licenses if they operate under their own name and report business earnings as personal income. Freelance writers and graphic designers, for example, are among those few businesses that may be able to get underway without official permission. However, if you are like the majority of business owners, whether a partnership or limited liability company (LLC), you will need at least some sort of business license to legally operate.
How To Get a Business License
Because every business, state, and municipality is different, there is no single route to getting a business license—or the multiple licenses and permits you may need. These general steps, however, should help.
Register Your Business
Start by checking with a local business lawyer to be sure your business must be registered, and to determine where and how you should register it. You will probably need a federal EIN; you can check the IRS website to be sure.
If you are “doing business as” (dba) anything other than your own name (e.g., “Donut Delights”) you will likely need to register your business name with your state—unless you have already filed as an LLC or corporation.
In addition, most states require you to obtain a state tax ID number if you’re planning to hire employees or sell goods or services. To do this, you’ll need to connect with your state’s Department of Revenue.
Determine Which Licenses You Need
If you’re starting a business in one of the fields governed by the federal government (including food services, agriculture, and anything related to alcohol or guns and ammunition), you’ll need a federal business license. You can find out whether that’s the case by visiting the SBA’s website and navigating to the right page from its general information about federal licenses.
Most businesses also need state licenses. Because every state is unique, visit your state’s website to research which license you need and how to apply.
Finally, your local municipality may also require you to have a business license. Call your local Chamber of Commerce or check your town’s website to find out what’s required.
Apply for Necessary Permits
If you’re a teacher, lawyer, dentist, doctor, or even a real estate broker (among other professions), you’ll need to pass specific tests in your respective field to receive a license or permit to practice. You may also need state and/or local permits to do business if you:
- Own or are leasing or building a structure
- Are hanging a business sign
- Plan to serve food or alcohol
- Plan to have live music
- Are located in a particular business or housing zone (or homeowners association)
Check in with your professional organization if you think you may need a state license or permit to conduct business. It’s up to you to be sure you have the right credentials to practice in your location.
In addition, check your state and local guidelines to find out what kinds of licenses and permits you need to run your business. Don’t assume that a home business requires none: If you’re hanging a sign, live in a strictly zoned area, are providing personal services, or otherwise doing much more than simply typing or drawing, chances are you’ll need at least one license or permit.
Frequently Asked Questions (FAQs)
Why do I need a business license?
Almost all businesses are required to have a license to operate legally. Some businesses require multiple licenses from federal, state, and local governments. If your business practices without the appropriate licenses, you may be liable for fines or other legal consequences.
Which states require a business license?
All states require business licenses, but each one has different business regulations. According to the SBA, states regulate more businesses than the federal government does—but some states are more business friendly than others. To learn more about your state’s requirements, visit its official website.