Getting Startup Paperwork Together

A look at the federal, state and local permits and registrations you'll need to do business.

By Asheesh Advani

Opinions expressed by Entrepreneur contributors are their own.

Entrepreneurs aren't known for being lazy, but most entrepreneurs I know are notoriously lazy about doing legal paperwork. But there's no place for laziness when it comes to getting licenses and permits for your business. It might seem like an insignificant detail or a waste of money, but it's necessary. This article provides some information on the types of licenses and permits that small businesses need and how to go about getting them cost-effectively.

The majority of small businesses in operation today are required to have one or more permits to ensure that they meet government-mandated guidelines for safety, soundness and tax. Generally, there are licenses and permits that you need to be aware of on the federal, state and local levels.

Federal Registrations and Licenses

Small businesses typically don't have to worry about safety and soundness licenses on the federal level, but every business should be aware of federal tax registrations. The first tax registration is the application for an Employer Identification Number. This is done on Form SS-4, found on the IRS's website , and should be filed by every business. If you're a sole proprietorship, you can use your social security number instead of getting an Employer Identification Number; however, this is not advisable if you want to keep your personal and business affairs separate. If you like the idea of separating business and personal but are concerned about the impact this separation will have on your taxes, consider incorporating as an S corporation, which will allow you to flow certain business losses to your personal income. You can learn more about how to register as an S corporation and how this varies from other forms of incorporation here . If you decide to register as an S corporation, you'll need to file Form 2553 with the IRS.

State Registrations and Licenses

Besides the licensing of professional occupations such as doctors and lawyers, many states require licenses for people such as hairdressers, mechanics, private investigators, real estate agents, tax preparers and more. Since the list changes across the different states, you'll need to check with the state you live in to find out the specific requirements. If you have the funds to consult with an attorney, this is the safest course of action. The least expensive way to get this information is to check with your local SCORE chapter or local SBDC , since the individuals who work in these offices will have guidebooks on licensing for your state. For example, the Pioneer Institute has produced a detailed guidebook on licensing procedures and regulations for small-business owners in Boston. It's useful to read through this free guidebook to get a sense of the types of regulations and permits you might need, particularly if you're starting one of the following types of businesses: day-care center, barber shop, beauty salon, caterer, cleaning service, sewing shop, shoe repair, flower shop, livery, small grocery store, street vendor or TV repair shop.

Some permits are registered under the name of the business, while others, such as permits for hairdressers or accountants, place obligations on the individual entrepreneur to register in his or her name. Generally, permits for the individual are needed for occupations and trades that require specific skills, examinations or ethical guidelines that are linked to the individual providing the services-such as standardized testing for accountants or proof of training for doctors. Keep in mind that both individual and business licenses expire and may require retesting before renewal is allowed.

State tax registration is another issue you'll have to make arrangements for, unless you live in one of the few states that don't assess income taxes. Otherwise, you'll need to register under your state's income tax laws. Check the website for your state's Treasury Department or Department of Revenue for details and forms for doing this.

If your business needs employees, your state's Labor Department can grant you the appropriate registration as an employer. Generally, if you use a payroll company to process checks to employees, this registration is provided. Even if you do your own payroll, once you file a tax return, your state's Labor Department will usually send you a form.

Local Licenses and Permits

Although usually not a huge concern, local taxes can be thorns in your side when you're trying to start a company, particularly if you don't address them right away. The city or town may leverage property taxes on the equipment and other assets that your business owns. Some cities charge taxes on inventory, gross receipts and income. Be careful about avoiding these taxes by claiming ignorance. You may be liable for back taxes.

In addition to the Department of Revenue, there are other departments on a local level that grant licenses, including:

  • The Health Department: If your business is a restaurant, catering service or other establishment that provides food preparation or sales, you'll need to be licensed through your local Health Department.
  • The police or fire department: If your business attracts large amounts of people, you may need to obtain a license from the local police or fire department.
  • The building and safety department: Renovation of any kind almost always requires a permit that states you're complying with local building ordinances and codes.

There's no doubt it's cumbersome to track down all the relevant licenses and permits you may need for your business. Despite my advice, I know that most of the entrepreneurs reading this column will sidestep the licensing process and consciously take on the risk of having to pay back taxes or penalty fees for noncompliance. I suppose that's better than ignoring licensing because of laziness.

Asheesh Advani

Asheesh Advani is CEO of Covestor, an online marketplace for investors. He founded CircleLending, which was acquired by Virgin.

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