When you first launch a home-based business, you’ll have a lot of things to do. In addition to the basic planning about what type of business you’ll run and how to get customers, you’ll need to establish your business legally.
Creating a new business often involves applying for business licenses and permits. This paperwork allows you to operate your business. Though this process may seem tedious, it is essential to get started.
Why Are Business Licenses Needed?
A business license establishes your business as legitimate. It helps separate your business from a hobby, which is helpful when tax season rolls around. Additionally, these licenses help the government to collect tax revenue. Setting this up properly can help you avoid expensive fines and fees.
Business licenses also help to protect the health and safety of the public. In short, they hold businesses accountable for their operations.
Licenses and Permits a Home-Based Business Might Need
Since there are so many different types of business licenses and permits, this article can’t cover them all. To help you get started, though, let’s dive into the most common licenses and permits needed for home businesses.
General Business Licenses and Permits
The licenses you need for your business depend on your location and the type of business you will operate. Depending on what the business does and its location, there are potentially federal, state, and local business licenses if conducting business within city limits. You may not need all three, so research your local laws.
Each state also has its own requirements. You can search for state business licenses and requirements for your location.
Once you receive a general business license, you may need to renew it every year. While some jurisdictions send out reminders, it’s best to keep track of this on your own. You do not want your license to expire.
Home Occupation Permit
Some local governments require businesses to run out of their homes to have a “Home Occupation Permit” or a “Zoning Permit.” Since your home is likely in a residential zone, there are possible restrictions on your business type.
Your neighbors don’t want to have to deal with increased traffic from people coming to visit your business. They also don’t want to hear a lot of noise or look out and see unsightly signage.
Most localities enforce zoning laws that place restrictions on the kinds of activities and the amount of space that can be devoted to home business. Local zoning laws can vary depending on the business’s location, whether in a town, city, or county. Additionally, the number of vehicles at your home may also be regulated.
Your signage may also be limited. Before you hang up any signs for your business, make sure you research what is legal. The type, placement, and size of your signs may be subject to approval in a residential area.
To get local permits, you’ll need to follow your city’s protocol. You may need to visit the city hall, the code enforcement department, or the planning department. Your city’s website may also have information.
If you have a homeowners association, there may be additional restrictions. Check with them before you launch so you know what the rules are.
The bottom line is to be sure to research your local zoning ordinances before investing a lot of time or money into the business to see if you can operate from your home and in your neighborhood.
Sales Tax License
Most businesses sell a taxable product or service, but you will need a sales tax permit or license if you need to collect sales taxes from your customers or clients. This allows you to legally collect and hold onto the taxes until they are due to be sent to the government. This number is applied for through the state’s taxation division, commonly called the Department of Revenue.
Laws in this area have recently changed and vary by state, so it’s a good idea to see the current requirements. If selling out-of-state, you may need to collect sales taxes depending on the volume of sales to customers in other states.
If your business begins taking off with out-of-state sales, you will want to consult a lawyer to make sure you have everything set up legally.
See how to register for a sales tax license.
Health and Safety Permits
Part of the government’s job is to protect the public, and health and safety permits help them to do that. If you plan to have customers come to your home, the fire department will usually need to do an inspection. This may also be required if you store flammable or hazardous products for your business.
If you will be handling food, a Health Department Permit and regular inspections of your kitchen may be necessary.
Professional Licenses
Some home-based businesses will require a professional license. These show that you meet a minimum standard in your industry.
Here are a few of the professional service businesses that often require professional licensing:
- In-home daycare provider
- Hairstylist
- Financial advisor
- Home inspectors
- Massage therapist
- Athletic trainer
You can learn more about industry licenses in this article on The National Occupational Licensing Database from The National Conference of State Legislatures. However, you’ll want to check your local laws to make sure they are the same.
Business Name
Registering a business name isn’t a business license but is a common item for a home-based business owner to register for. Several home-based businesses are sole proprietorships, which are business entities that are run by one individual and aren’t legally separated from the owner. Some will want the additional legal protection an LLC provides, though.
Registering a business name (sometimes referred to as an assumed name, DBA, or fictitious name) for a sole proprietorship typically takes place through the County Clerk’s office.
Learn how to register for a DBA.
How to Get a Home Business License
When you’re ready to get started, don’t wait until the last minute to get a business license application. There are often several steps involved, and it may take some time.
Before you begin, you’ll need to have your business location picked out. This way, you can check state, county, and local laws so you are completely legal.
You may also need an Employer Identification Number (EIN) for your business. An Employer Identification Number may be required only for businesses with employees or an incorporated business structure like a corporation or Limited Liability Company. The EIN is a number from the Internal Revenue Service (IRS) that uniquely identifies a business. If it isn’t needed, the business owner will use their social security number.
There is no cost to apply, and it only takes a few minutes.
Learn how to register for an EIN.
How much do business licenses cost?
The cost for business licenses varies by type and location but is typically in the $20-$500 range. Licenses for smaller home businesses are typically less inexpensive.
Do You Need a License for an Online Business?
While there isn’t a special license specific to running an online business, if you are running a business out of your home, it is still considered a business, and the above licenses will still apply.
Be sure to review your homeowner’s insurance policy
Once you know what types of business licenses and permits you’ll need, take the time to review your homeowner’s insurance policy before you start applying. Some companies won’t cover claims related to a home business. Others limit the type of business activities you can use your home for. Take time to read the fine print.
If you only have a standard home insurance policy, there’s a good chance that it only covers personal property. You might still need business liability coverage and insurance to protect business assets.
Related: What Insurance Does a Home-Based Business Need?
Legally Establish Your Business
Since business permits vary so much, there isn’t a one-size-fits-all solution. You may need to connect with local professionals to ensure you meet your local requirements.
Legally establishing your business will take time, effort, and some money. But it will be worth it once you get started.