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Business License

Definition: A legal document that grants you the right to operate a business in your city. Depending on your business, there are other licenses that may also be required.

Although some business owners think that licensing and permit fees are ways for the government to wring even more money from the business sector, most of these programs are intended to protect the general public. In big cities, license bureaus are set up to control business locations--to keep people from operating an auto-repair business next door to a school, or to keep people from running certain types of businesses from their homes. For example, most states forbid certain things from being manufactured in the home, such as fireworks, drugs, poisons, explosives and medical products.

Failure to comply with the licensing and permit requirements for the type of business you plan to start in your jurisdictions could result in additional fees, penalty payments or operational restrictions until conditions specified by the regulating authority have been met. So no matter what you think of the licensing process, don't neglect it!

Contact your city's business license department to find out about getting a business license. When you file your license application, the city planning or zoning department will check to make sure your area is zoned for the purpose you want to use it for and that there are enough parking spaces to meet the codes. If you're opening your business in a building that previously housed a similar business, you're not likely to run into any problems.

Most small-business owners require only a local business license, which allows the business to operate within the city and county where it's located. This business license is either a municipal license, if your business is located within a city, or a county license if you're located in an unincorporated area of the county. If you intend to open multiple locations or conduct business in different cities or counties, you'll need to apply for a license in each of those jurisdictions.

Some cities and counties don't require a business to obtain a license, while others collect a business-licensing fee on an annual basis. In addition to the license fee, some cities receive a percentage of a business' gross sales as well as sales taxes if the business is required to collect them.

Before visiting city hall or the county administrative building, call the licensing bureau of the city you plan to operate in or the county registrar's or recorder's office to find out about their licensing requirements and application procedure. This will save you time because you can have all the necessary materials ready prior to applying for your license.

Operating some types of businesses may require a state license or an occupational permit from the state agency that administers consumer affairs for people engaged in certain occupations. Licensing is commonly required for auto mechanics, plumbers, electricians, building contractors, collection agents, insurance agents, real-estate brokers and workers providing services to the human body (barbers, cosmetologists, doctors, nurses, funeral directors, and so on). Often, these people must pass state examinations before they can conduct business.

Some states have licensing requirements based on the product sold, such as liquor, lottery tickets, gasoline or firearms. And if your business is food-related, you'll have to deal with local health officials and state regulations. If your state has a "commercial kitchen" law, it may be extremely difficult to set up a food-related business in your home. If your business releases materials into the air and water, you'll have to get approval from your local environmental protection agency. If you plan to work with flammable or dangerous materials, you'll need approval from your fire department. Your state government can provide a complete list of occupations for which licensing is required in its jurisdiction.

If the state you operate your business in has a state income tax, you'll have to register and obtain an employer identification number from your state Department of Revenue or Treasury Department. If your business sells retail, you'll need a sales tax license.

Although most businesses don't require a federal license or permit, these do:

  • Investment advising
  • Drug manufacturing
  • Preparation of meat products
  • Broadcasting
  • Ground transportation
  • Selling alcohol, tobacco, or firearms

For information on federal government requirements and services for businesses, visit the U.S. Business Advisor, an internet service for entrepreneurs run by the SBA. Through its Business Law Center, you can get information on both federal and state requirements for licenses and permits.

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