Business Licenses: Staying in Compliance

Your business, even if you're working at home, may require federal, state and local licenses and permits.

Every business, even those operated from home, may require federal, state and local licenses and permits. What’s more, getting the initial licenses is only the first stage in business license requirements. Most business licenses require periodic renewals and any change in business ownership or operations can result in the need for new licenses or amendments to current licenses.

CT Tip: This article covers your ongoing responsibilities, provides tips for compliance, and alerts you on the risks of failing to have and maintain the necessary licenses and permits. The companion article, Business Licenses: What You Must Know When Starting a Business discusses the types of licenses, permits and registrations that your business may initially require in preparation for opening your business for customers. 

Initial Licensing Requirements: A Review

When starting a business, you need to determine which federal state and local licenses, permits and registrations are required. You must obtain all the necessary permits before you open for business—or face steep penalties. (And, certain professions have licensing requirements that are completely independent of the licenses needed to operate a business providing those services.) When obtaining initial licenses, you need to make sure that you define all the activities your business involves and satisfy the licensing requirements for each of those activities.

> Find Out How Many Licenses Your Business Needs

Federal registrations and licenses generally are required only for highly regulated industries, such as aviation, mining or telecommunications. However, businesses that involve the manufacture or sale of any type of alcohol, tobacco, or firearms are required to obtain a variety of federal—as well as state and local—registrations and permits. Also, virtually every corporation and LLC must obtain a federal tax employer identification number.

Although few federal licenses are needed for the average business, state and local governments have a multitude of licensing, permit and registration requirements. State governments may require several tax identification numbers and registrations, such as sales tax and unemployment compensation. They are likely to require liquor licenses, minor work permits, specific occupational licenses / permits, and professional licenses. Local jurisdictions often have permit regulations tied to health, safety concern and aesthetic concerns: zoning, occupancy, signage, health inspections, and liquor licenses.

Business Licenses: What You Must Know When Starting a Business provides more detail about the types of licenses and the process for obtaining them.

Maintaining Licenses: Don’t Fall Out Of Compliance

Obtaining the necessary pre-opening licenses is just the start. Unfortunately, it’s easy to forget about on-going business license compliance responsibilities, which can prove costly. Staying in compliance requires that you pay attention to these factors:

Renewal requirements. Nearly every license is valid for only a specific period of time. Many licenses must be renewed annually. In some cases, all permits must be renewed by a given calendar date; in other cases, the renewal date is tied to the date on which the license was issued. And, just as licensing requirements vary widely, so do license renewal fees and charges. Make sure to account for these costs when establishing your budget—particularly if many charges fall in the same month.

Changes in your business operations. If you expand your business—whether it is by remodeling your building, opening a second location or launching a new product or service line—you may need to obtain new licenses or amend existing ones. For example, remodeling will require building permits, could require zoning variances, and may require re-inspection for a new occupancy permit.

Similarly, adding new products can result in the need for new licenses. For example, if you operate a beauty parlor, the stylist’s charges may not be subject to sales tax. (State rules vary widely on what services are taxable.) If you then decide to sell a line of beauty products, you may need to apply for sales tax identification numbers. Many licenses are highly specific. One class of liquor license may only permit the sale of wine or beer. Adding the sale of liquor would require a new, or amended, license.

Most business licenses, particularly local licenses, are valid only for one location. If you add a new location, especially if it is in a different city, you may need to start from square one with licensing applications. Other business changes that can trigger the need for new or amended licenses can include:

Adding an additional owner to the business, changing the business name, changing the operating hours or hiring minors. Closing a location or going out of business generally requires you to cancel existing licenses.

Changes in laws and regulations. Granting licenses to operate serves a number of purposes for governments—raising revenue, controlling certain types of activities, ensuring public safety, and promoting certain types of industries. As a result, the licensing laws are likely to change over time. This means that you need to be vigilant in order to comply with the current version of the laws.

Best Practices to Remain in Compliance

These two best practices will help you remain in good standing with the licensing agencies:

  • Keep a master list of all renewal dates. In addition to having the renewal dates, make sure your master list includes the information and costs needed to obtain the renewal. Once you have your master list, set up a reminder system that delivers a reminder (or series of reminders) for any pending renewals well in advance of deadlines.
  • Add “update business licenses” to your to-do list. When you make any change regarding your business or your business operations, check to see if there is any impact on your existing licenses or if there is a need for additional licenses. For example, if you change your business name or incorporate your sole proprietorship, you will need to update your licenses accordingly. You may even need to update your information if you change the hours or days of operation.

As you learned through the process of acquiring your initial licenses, complying with all the federal, state and local requirements can be costly, as well as aggravating and time-consuming. However, you can deduct the costs of obtaining licenses as a business expense—so make sure that you keep good records that include: the license name, cost of obtaining the license, the date paid, and evidence of the payment.

Failing to Have Necessary Business Licenses Can Have Severe Consequences

Failing to keep your business licenses current can result in hefty fines and penalties. (A few violations even carry criminal penalties.) What’s more some fines and penalties can be imposed on the owners of a business, not just on the business itself. Government agencies may also have the right to shut down your business (or even seize your assets) for failure to comply.

Example: Recently the Oklahoma Alcoholic Beverage laws enforcement Commission seized all the equipment and supplies that a Tulsa restaurant used to create its signature craft beers because the restaurant had failed to obtain the necessary licenses.

Not only will a shutdown cost you in lost revenue for the days you are shuttered, but you may also lose the goodwill of your customers and damage the reputation of your business.

As tedious as the process is, keeping your licenses up-to-date helps to maintain your good reputation, goodwill, and positive public relations given today’s increased focus on compliance and transparency. one way to simplify this process, avoid numerous phone calls and online searches, and ensure you are on top of law changes is to partner with a business compliance service, such as CT.

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