What is a business license and why do you need one?

Editorial Team

4 min read
Woman entering information on laptop

You have a fantastic idea for a new business – one you’re confident will be a success. Yet, before you can set up shop or launch an online store, you may need to apply for any number of business licenses first. These local, state, and federal permits are what allow you to legally run and operate your business.

Although some entrepreneurs may dismiss the idea of getting a business license, the goal of these governmental permits is to protect consumers and the general public.

For example:

  • Restaurants need business licenses and inspections to help ensure basic food safety standards are met.
  • Communities might implement zoning permits to prevent nearby factories from dumping toxic waste.
  • Pharmaceutical companies cannot send untested drugs to market without going through lengthy approval processes.

However, public safety isn’t the only reason why you should apply for the necessary permits.

The risks of not getting a business license

In most cases, applying for a business license costs money. This expense partially explains why some entrepreneurs choose to skip the process.

Failure to apply for a business license, and remain in good standing, can be far more expensive once you have factored in the penalties, fines, possible closure of your business, and even jail time that may occur.

It doesn’t matter how big or small your business is, or even if it’s for-profit or nonprofit, either. Many municipalities, for example, require that churches, charities, and other nonprofit organizations also apply for business licenses.

Types of business licenses

There are different types of business licenses administered at the local, state, and federal levels.

1. Local business licenses

Local business licenses allow companies to operate at the city or county level. Although the exact purpose of these permits varies from jurisdiction to jurisdiction, municipalities may use them for recordkeeping, taxes, and zoning. Many cities also use these licenses to establish hours of operations.

2. State business licenses

Business permits of this sort vary from state to state – usually focusing on industry-specific activities. Lawyers, healthcare workers, stylists, and barbers must be certified to work in their states.

Here’s a rule of thumb to follow: If your business offers the type of service you would normally look up on a review site, there’s a good chance a state business license is needed.

3. Federal business licenses

As a general rule, federal business licenses are required for those companies operating in fields or sectors that are directly regulated by the federal government. Anything to do with day trading, for example, would fall into this category since the Securities and Exchange Commission oversees this particular area. The same goes for liquor and cigarettes – both of which are regulated by the Bureau of Alcohol, Tobacco, Firearms and Explosives.

Other types of businesses that may need to apply for federal licenses include those working in:

  • Agriculture
  • Aviation
  • Fishing and wildlife
  • Maritime transportation
  • Mining and drilling
  • Radio/TV broadcasting

How to apply for a business license

There are many types of business licenses – each with their own specific requirements and approval processes. This makes it challenging to know where to start or how to obtain a business license (or several) for your startup.

If you need anyfederal permits, a good place to begin is with the Small Business Administration. It has a dedicated dashboard that will redirect you to the most appropriate issuing agency. Procedures become a little more complex if you want to apply for a business license at the state or local level. Contact your city or town hall to learn more.

Depending on your type of business, it may take a while to get through all the relevant paperwork and approvals. Once you’re ready, we can help you tackle other challenges of starting a business, such as accepting payments, managing employees, and engaging with customers.

To learn more, schedule a free consultation with a Clover Business Consultant today.

This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.

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