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Licenses and Permits: Overview

It may seem strange to you that your small consulting service or home-based handknit sweater business would need to comply with numerous local, state and federal licensing and permit requirements, but in all likelihood it will, so it is important to understand what to expect.

Business licenses and permits can range from the general (a basic license to operate a business within a city or county), to the specific (a state permit to sell alcohol or firearms). Bear in mind that regulations vary by industry. Carefully investigate the licensing and permit requirements that affect your industry, and avoid any temptation to ignore these important regulatory details. Being out of licensing and permit compliance could leave you unprotected legally, may lead to expensive penalties, and can jeopardize your business.

Who Issues Business-Related Licenses and Permits?

Business-related licenses and permits are issued at all levels of government -- federal, state, and local (city, county, or town). For example, if you decide to open a bar and grill in the city of Chicago, you will need to obtain all necessary licenses and permits from the city of Chicago, the state of Illinois, and the U.S. government. So, you will most likely need (among other possibilities) a federal tax ID number from the U.S. government, a license to sell alcoholic beverages from the state of Illinois, a health permit from the city of Chicago (to prepare and sell food), as well as a basic business license to operate the bar and grill within the city. A discussion of these and other types of licenses and permits follows below.

What Types of Licenses and Permits Does a Business Need?

Following is a discussion of some of the most common types of licensing and permit requirements that affect small businesses. This list is by no means exhaustive, and it is important to check with government agencies at all regulatory levels to ensure that your business has obtained all necessary licenses and permits:

Business Licenses. There are many types of licenses. You need one to operate legally almost everywhere. If the business is located within an incorporated city's limits, a license must be obtained from the city; if outside the city limits, then from the county. For more information contact the county or city office in your area or try these state web sites that offer business license information

Property Use Permits. If you start a business that involves manufacturing, or if you decide to begin operating a business out of your home, depending on your location you may need to obtain a land use permit from your city or county's zoning department.

Building Permits. If you are constructing a new building, or expanding or renovating an existing building in order to operate a business, you will most likely need to obtain a building permit from the city or county. The process may require that you submit a detailed set of plans to the department prior to approval of the work and issuance of the permit.

Certificate of Occupancy. If you are planning on occupying a new or used building for a new business, you may have to apply for a Certificate of Occupancy from a city or county zoning department.

Health Department Permits. These permits are most often required for businesses involve in the preparation and/or sale of food, among other types of businesses.

Licenses Based on Type of Product Sold. Some state licensing requirements are based on the type of product the business sells. For example, most states require special licenses before a business may sell liquor, lottery tickets, gasoline or firearms.

Professional / Occupational Licenses. If you intend to open a business, and you (and/or the people who work for you) will be offering services in a wide range of areas -- including medical care, auto repair, real estate sales, tax services, cosmetology, and legal representation (attorneys) -- the business itself and/or the individual employees working for the business must apply for and obtain state licenses authorizing the practice of such a profession or occupation. Often, issuance of these licenses requires the applicant to show certain skills or training.

Employer Identification Number. Most business are required to obtain a federal employer identification number (or EIN; sometimes called a tax identification number) from the Internal Revenue Service (IRS). Your business may also need to acquire a similar tax identification number from your state's department of revenue or taxation.

Sales Tax Licenses and Numbers. In your state there may be a percent sales and use tax which applies to the retail purchase, retail site, rental, storage, and use of personal property and certain services. In other words, sales tax must be collected on just about every tangible item sold. A sales tax number is required for each business before opening. The number, plus instructions for collection, reporting and remitting the money to the state on a monthly basis, can be obtained from your state's treasury department or department of revenue.

Licenses and Permits: Beware of "Grandfathering" Issues

If you are starting a business, one of the most important things to watch out for concerning licensing and permit compliance is the concept of "grandfathering." In the business permit and licensing context, "grandfathering" means that a new law or code is not enforced against those businesses and/or individuals who are already in business at the time the law is passed, so those businesses or individuals are excused from obtaining any license or permit that might be required under the new law.

Keep the issue of "grandfathering" in mind when comparing existing businesses in an area to one you might start nearby. As a new business, you may need to obtain licenses and permits (and take additional regulatory compliance steps) that an existing business may not. "Grandfathering" is something you need to watch out for ESPECIALLY if you are considering buying an existing business from an owner who has been in the same location for a significant period of time.

The key thing to remember with "grandfathering" is that, once a business changes hands (i.e. it is bought and sold) the new owner will most likely be required to come into full compliance with all local regulations, including any from which the prior owner was exempted, and so may need to obtain certain licenses and permits that were not required of the previous owner. This can be an expensive prospect for a new business owner if, for example, obtaining these permits requires major building renovations to meet existing building access requirements -- such as widening stairwells or even installing elevators. In such a situation, before you buy the business it is extremely important that you contact your local government (at the city, county, or town level) to find out what licenses and permits would need to be obtained.

Next Steps
Contact a qualified business attorney to help you
navigate the process of starting a business.
(e.g., Chicago, IL or 60611)

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