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 in 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 the partnership, corporation, and Limited Liability Company (LLC).

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 it is 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 few 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 license do I need isn’t an easy one to 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: 

• Agriculture: Businesses which import or transport plants, animals, or biological products must acquire a license from the Department of Agriculture. 
• Alcohol: If you manufacture or sell alcohol, you must apply for a license with both the Alcohol and Tobacco Tax and Trade Bureau and your local state licensing board. 
• Aviation: If you plan to operate aircraft or perform maintenance on aircraft, you must receive a license from the FAA. 
• Firearms: If you manufacture or sell firearms, you must apply for a license with ATF. 
• Wildlife: If you import or export wildlife, apply for a license from the Fish and Wildlife Service.
• Commercial Fishing: If you operate in the commercial fishing industry, you must register with the NOAA Fisheries Service. 
• Maritime Transportation: Apply for a license from the Federal Maritime Commission.
• Mining: The Bureau of Safety and Environmental Enforcement manages licensing for mining businesses.
• Nuclear Energy: The Nuclear Regulatory Commission manages licensing for nuclear businesses.
• Broadcasting: If you plan to operate a radio or TV broadcasting business, apply for a license from the FCC.
• Logistics: The Department of Transportation manages licensing for logistics-oriented businesses.

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, however, it may also be called a trade name, fictitious business name, or assumed name registration,

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

Related: How to register a DBA

Sole Proprietorship Business Licensing Frequently Asked Questions

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.