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Does A Sole Proprietor Need A Business License?

Does A Sole Proprietor Need A Business License?

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Does A Sole Proprietor Need A Business License?

While sole proprietors do not need to file articles of incorporation or formally register their business entity with the Secretary of State, the industry within which they operate may require certain licenses or permits.

What is a sole proprietorship?

Simply defined, a sole proprietorship is an individual who goes into business with the intention to make a profit.  A sole proprietor has complete ownership of the business and is free to make any decision he or she wishes concerning the business.

It’s important to note that a business license is different from registering a business entity. A business entity refers to how a business is organized to operate. The sole proprietorship is one type of business entity. Other popular entities include partnerships, corporations, and Limited Liability Companies (LLCs).

Related: How do I register a sole proprietorship?

What are the advantages of a sole proprietorship?

The sole proprietorship offers several advantages over other types of business entities, such as being easy and inexpensive to set up as there is no need to register the business entity. In addition, the sole proprietorship is less complex than the corporation as there are fewer formalities such as holding annual meetings, having a board of directors, issuing shares, and more. 

The biggest downside to the sole proprietorship is that it doesn’t protect the business owner’s assets. If the business is sued or the business can’t cover it’s debts, the business owner is personally liable. 

Related: How does an LLC protect your personal assets?

Which Permits and Licenses Does a Sole Proprietor Need?

The question as to what business licenses are needed isn’t always a straightforward answer, as licensing requirements vary by local, state, and federal regulations depending on what the business does and where it is located. 

Learn more about which licenses a Sole Proprietor may need.

General Business Licensing

To dispel a common myth, there isn’t a “general” business license. There are a handful of states that require a business license, however, a business license is more often found at the city level. Unfortunately, there isn’t one place to search, so you will want to check with your local city hall, Chamber of Commerce, or economic development agency to see if a business license is required in the city where the business will operate. 

In addition to business licensing, there are other federal, state, and local requirements for a business to be aware of. 

Related: List of common business licenses

Federal Licensing Organizations

The following federal regulatory agencies manage licensing for businesses in high-risk industries: 

Employer Identification Number

The Employer Identification Number, or EIN, is a nine-digit number that is assigned to a business for federal tax purposes. This number is optional to a sole proprietor if there aren’t going to be employees. In this case, the business will simply use the owner’s social security number. 

If employees are going to be hired, then the business will need to apply for an EIN from the Internal Revenue Service.  

Related: How to apply for an EIN

Professional Licensing

At the state level, many professions are regulated and will require a license from the appropriate regulatory agency. 

Each state has different requirements, but there are many professions that are regulated, such as barbers, hairstylists, architects, locksmiths, and others.  In addition, to perform tax preparation, all state governments require you to possess an active CPA license. However, each state has a separate CPA licensing process.

Other industries may have similar requirements across states for those sole proprietors seeking to acquire a professional license. 

Sales Tax Licenses

Another state registration for a sole proprietorship could be a sales tax permit. In order to legally sell taxable products and services, a business will need to register with the state and begin collecting sales taxes. 

Each state has different sales tax requirements and is typically regulated under the state’s Department of Revenue or a similarly named taxing agency. 

Related: How to register for a sales tax license

Name Registration

In some states, sole proprietorships will need to register the legal name of the business. In most areas, this is referred to as a DBA or Doing Business As registration, which may be called a trade name, fictitious business name, or assumed name registration,

Each state has different rules, but DBA registration is typically handled in the county where the business is located.

Related: Do I need an EIN for a DBA?

Sole Proprietorship Business Licensing Frequently Asked Questions

Is a business license the same as a sole proprietorship?

No. Local, state, and federal government regulatory agencies issue licenses for businesses in order to legally operate. A sole proprietorship refers to the legal structure of a business.

Do you need a business tax ID for a sole proprietorship?

If you operate a sole proprietorship without employees, the IRS states that you may use your Social Security Number (SSN) instead of registering a new Employer Identification Number (EIN).

Can a sole proprietorship have employees?

Yes. Before hiring employees, the business will need to register for an Employer Identification Number (EIN) with the IRS, in addition to registering as an employer with the state.

What is the difference between a sole proprietor, self-employment, or independent contractor?

These terms are often interchanged but can have slightly different definitions as one refers to the business structure and the others a designation.

At its core, a sole proprietor or independent contractor is a self-employed individual, but a self-employed individual or independent contractor is not necessarily a sole proprietor.

Related: What is the difference between a sole proprietor, self-employment, and independent contractor?

Penalties for Not Registering Sole Proprietorships or Acquiring the Proper Licenses

The penalties for failing to acquire the appropriate license for your industry include fines, civil actions, and criminal penalties, including prison time for the sole proprietor in extreme cases.

The IRS may levy penalties for sole proprietors who fail to acquire an EIN when the circumstances require it, including the hiring of an employee.

As with other entities, such as limited liability companies, the revenue earned by a sole proprietorship passes through to the proprietor as taxable income. Fortunately, this attribute of sole proprietorships simplifies the tax filing process for your business.

Additionally, sole proprietors face the same unlimited legal liability that other types of unincorporated entities face. Your personal assets will have no protection as a sole proprietor, even with the appropriate licenses, in the event of lawsuits. 

How to Get Started with the Business Licensing Process

First, you should identify in which industry you plan to operate your business. Highly-regulated industries like agriculture and wildlife will require an extensive federal licensing process with the relevant agencies. 

Next, you should identify the jurisdictions in which you plan to operate, including the local and state government regulating bodies. 

You may also consider retaining the services of an attorney or industry expert to help guide you through the sole proprietorship licensing process. 

Finally, you can learn more about acquiring the necessary licenses for your business in this helpful guide.

Author

  • Greg Bouhl

    With over two decades as an entrepreneur, educator, and business advisor, Greg Bouhl has worked with over 2,000 entrepreneurs to help them start and grow their businesses. Fed up with clients finding and acting on inaccurate and outdated information online, Greg launched StartUp101.com to be a trusted resource for people starting a business.

Does A Sole Proprietor Need A Business License?

Does A Sole Proprietor Need A Business License?

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