Whether you need a business license as a sole proprietor will depend on several factors, such as the state you operate in and the nature of your business (e.g., what products and/or services you sell, etc.).
In this Does a Sole Proprietor Need a Business License article, we have broken down everything you need to know to navigate the legal landscape confidently and keep your business on the right side of the law.
Let’s get started.
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Sole Proprietorship Business License
In a sole proprietorship, you serve as the sole owner and operator of the business.
While this provides a streamlined setup process and grants you unobstructed control over your business activities, it’s important to note that you will still need to operate in a way that is compliant with your legal responsibilities.
Below we’ve broken down the ample legal considerations that you will need to take into account when deciding whether you will need a business license as a sole proprietor or not.
As we’ve mentioned above, there is no one-size-fits-all answer to the question of whether you need a business license as a sole proprietor; this is because this will actually be influenced by a range of factors and legal considerations.
For instance, the industry you operate in — be it healthcare, food, or retail — can affect the kinds of permits you will need. Your physical location, whether it’s a home office or a storefront, can also dictate whether you will be subject to different kinds of licenses and/or permits.
It’s also crucial to note that these regulations are not consistent across the board, and can vary significantly from state to state or even city to city.
For example, some areas may have a uniform business operating license that’s applicable to all types of businesses, while others could have none, or could have city-specific licenses and/or permits.
This means that it is imperative that you take some time in order to consult reliable sources, such as your state’s official website, or to seek professional legal advice that’s tailored to your business. Alternatively, you can use a third-party service (as a more affordable alternative).
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The Importance of a Business License
Obtaining the right business licenses can dramatically impact your company’s success and longevity.
This is because having the correct business licenses is a fundamental requirement for securing loans and other financial support from banks, as it can assure financial institutions that your business is operating within the required legal framework.
Potential business partners and investors can also generally request proof of licensing as part of their due diligence, which can make licensing a key factor when it comes to expansion opportunities.
On the consumer side, licenses can serve as a mark of quality assurance, giving clients added confidence in your services. Lastly, staying compliant helps you adapt to industry changes more easily, as you’re already meeting current standards. Neglecting to secure proper licenses can result in financial penalties and legal repercussions, up to and including the shutdown of your business.
Note: The simple operational structure that a sole proprietorship offers does not equate to a simplified legal landscape. In reality, you are held to the same legal standards as any other business entity, and these standards can change dramatically depending on where and how you operate.
Therefore, it’s of paramount importance to diligently research and understand the legal requirements that pertain to your business. Failure to do so not only jeopardizes your operations but can have a long-lasting impact on your business’s credibility and reputation.
How to Get a Business License
Securing a business license is subject to a range of considerations, and the steps involved can differ. Here’s a rundown of the usual procedures.
Step 1: Form Your Business
Even though you will not need to officially register your business with the Secretary of State as a sole proprietorship in most states, this is not the case with LLCs or Corporations.
Generally speaking, most small business owners choose to form an LLC due to the added flexibility, legal protections, and relatively low cost.
If you are interested in forming an LLC, you have to file your state’s Articles of Organization (also known as the Certificate of Formation) independently, hire a third-party service (recommended), or work with a business attorney.
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Step 2: Obtain an EIN
Prior to applying for a business license, you need to secure your Employer Identification Number (EIN), a nine-digit identifier issued by the IRS for the purpose of financial tracking for businesses.
Having an EIN is often mandatory for acquiring permits and licenses, as it helps government entities at different levels ensure your business’s compliance. Acquiring an EIN is possible online, through traditional mail, or via phone.
Note: Keep in mind that obtaining an EIN will only be required if you plan to hire employees; if this is not the case, you will be able to apply for your business licenses and/or permits with your SSN.
Step 3: Apply for Licenses and Permits
With a suitable business structure and an EIN in hand, your next move will be to secure the applicable licenses and permits for legal operation within your locality and industry.
- Local Licenses: Local licenses enable you to do business within a specific municipality or county. The costs and prerequisites differ by locality and usually involve an online or in-person application at the governmental office. Required details typically include your business name, location, contact information, and EIN
- Statewide Licenses: For businesses involved in selling goods or services, a state-issued seller’s permit is often mandatory. Additionally, professionals in certain fields — such as law, medicine, and skilled trades like electricians — may be required to obtain specialized state-issued licenses
- Federal Licenses: If your business falls under federally-regulated sectors (e.g., alcohol distribution, firearms sales, commercial fishing, agriculture, etc.), you may need to comply with additional regulations in order to operate legally. These specialized fields often mandate obtaining licenses from federal agencies such as the Alcohol and Tobacco Tax and Trade Bureau or the Bureau of Alcohol, Tobacco, Firearms, and Explosives
Note: The SBA’s Business License and Permit Tool can be a handy resource to identify what you’ll need based on your business and location.
Step 4: Renewal of Licenses and Permits
Renewing licenses and permits involves varying procedures, depending on the nature, tier, and geographic scope of your license or permit. Most expire after a designated period, such as annually or biennially.
It’s essential to keep a tab on expiration dates and renewal windows. While government agencies usually send reminders, the onus will be on you to renew in a timely manner.
Renewal may have requirements and fees that differ from the initial application. Consult the issuing authority or their online resources for specific information.
Due to the intricate nature of applying for and renewing licenses, a growing number of businesses opt to employ third-party services to manage the process from start to finish.
For more detailed insights, check out our comprehensive guide on How to Get a Business License.
Does a Sole Proprietor Need a Business License FAQ
What do you need to operate as a sole proprietor?
To operate as a sole proprietor, you primarily need a clear business plan, some initial capital, and a good understanding of your tax obligations. Depending on your state and the nature of your business, you might also need a business license or specific permits.
Do I need to register a sole proprietorship to operate?
While registering a sole proprietorship is generally not mandatory, it’s advisable to file a DBA (Doing Business As) name if you plan to operate under a name different from your own. Having said that, you may be required to satisfy certain local, state, and even federal requirements in order to operate. For more information, have a look at our Does a Sole Proprietor Need a Business License article.
Do I need a business license as a sole proprietor?
Yes, most sole proprietors are required to obtain a business license in order to operate legally. This necessity is often dictated by factors such as your location and business type. Failing to secure the appropriate license can result in penalties, making it crucial to verify the specific requirements in your jurisdiction. Interested in finding out more? Check out our How to Get a Business License article.
How do I get a business license?
Getting a business license usually involves registering your business name, obtaining an Employer Identification Number (EIN), and then applying for the applicable license(s) at your local or state government office. The process and fees may vary by location and business type.
For all related articles, have a look at our How to Get a Business License page.