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.
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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 is president of
CircleLending, a loan administration company that
facilitates personal loans, small-business loans, and mortgages. He
and his company have written theSmall Business Financing Guidefor startups and
have helped small businesses in more than 30 states launch and
finance their growth.
The opinions
expressed in this column are those of the author, not of
Entrepreneur.com. All answers are intended to be general in nature,
without regard to specific geographical areas or circumstances, and
should only be relied upon after consulting an appropriate expert,
such as an attorney or accountant.