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What Sole Proprietors Need to Know About Business Licenses

business.com editorial staff
business.com editorial staff

If you conduct business, even as a sole proprietor, you have some municipal rules.

  • In order to conduct business as a sole proprietor, you must have some municipal rules.
  • A sole proprietor is anyone who owns an unincorporated business by himself or herself.
  • Some of the most common licenses that sole proprietors are required to have are operational licenses. occupational licenses, federal licenses and permits.

Freelance work can be liberating. You have the freedom to set up shop anywhere you'd like and conduct business from the kitchen, home office, a coffee shop or at 35,000 feet. It has dramatically reshaped the way we think about work and empowered individuals to pursue a living without the constraints of the traditional 9-to-5.

However, just because your business blurs the traditional lines of the working world doesn't mean that some of the standing laws and regulations about a business license and other matters don't apply. In fact, there's a decent chance that if you conduct business, even as a sole proprietor, you have some municipal rules to follow.

Know what the law says

First, let's understand the terminology involved. According to the IRS, a sole proprietorship is "someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation."

There are various reasons why one may go the sole proprietorship route for creating an LLC. For many solo operations, a proprietorship makes the most sense with minimal costs. However, it can lull you into the sense that you're in a regulation-free fantasyland.

In particular, don't assume just because you're a one-person operation or that your work is conducted entirely online that you're exempt from business license restrictions.

Consider the following language from the Alameda County website: "All individuals, partnerships, corporations, and sole proprietors conducting business in the City of Alameda are required to have a business license."

In many cases, such a license is not cost-prohibitive. But again, this varies based on where you live. The best way to tackle this issue is to research your city, county, township or other local municipal organization and find out what the rules are.

Types of business licenses sole proprietors might need

If you are a sole proprietor, you may need a wide variety of licenses in order to remain in operation legally. According to Small Business Chronicles , some of these licenses might include

  • Operational licenses: Most sole proprietors need to possess an operational license, at the minimum. This license is most often required if the sole proprietor has a taxpayer identification number. In some instances, sole proprietors are required to maintain a state-issued license in addition to general license in cases in which the activities are being regulated by the government. These licenses can be obtained from the city or county in which they are conducting business.

  • Occupational licenses: Sole proprietors that are involved in a trade or profession require an occupational license. This type of license ensures the proprietor has the legal authority to provide a particular service. Some examples of businesses that need occupational licenses are tattoo shops, massage trainers, dietitians, childcare, and more. These licenses can be obtained from state departments.

  • Federal licenses: A sole proprietorship in sectors that are federally regulated require a federal business license. Services such as ground transportation, investment advising, manufacturing firearms, and many others are federally regulated. Some examples of federal industries include aviation, fish and wildlife, radio and television broadcasting, and more.

  • Permits: Sole proprietors may also need any variety of permits in order to be able to remain in operation. For example, they may need a DBA (doing business as) name, which is an assumed name under which you will conduct your business. They may also need permits from the health department if they are involved in the sale or preparation of food. If you have a home-based business, you may need land and zoning permits. Additionally, according to Legal Zoom, you may also need permits such as fire permits (if you are dealing with flammable materials) and environmental permits (for businesses that may cause environmental pollution), among others.

  • Local licenses: Most businesses have to obtain local licenses. Local licenses often carry the smallest fees and are the easiest to obtain.

  • State licenses: If you are selling products or services that are regulated by the state, you need to apply for a state license. There are specialized state licenses for mechanics, lawyers, barbers, building contractors, and more. Additionally, businesses that are required to comply with state regulations, such as restaurants, also need state licenses.

  • Sales tax: According to Tax Jar, the majority of the states require a sales tax permit or license for most retail businesses. This means you may need a sales tax license to make it legal for you to charge sales tax to their customers.

Where to apply

For a business license, location matters. If you live in the unincorporated area of a county, you will likely need to apply for the license through the county instead of from a city. By that same token, you'll need to check the city's website to see if it requires that business conducted requires a permit.

It may be tempting to think just because you're working away from the back patio that you're not going to be noticed by the team from the county office. Tax revenue is critical for your community, and if altruism doesn't work, consider that you could be subject to penalties for the time you were operating without a license.

Arguments about the proper role of regulation aside, part of running a business means taking care to follow the right laws and codes so you stay on the good side of the law. The freedom of solo freelancing is great, but it's worth remembering that you're still part of the business world and it has some rules for you to follow.

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