The beauty of the modern economy is that you can make free decisions as to what products you want to produce, at what price you want to sell them, and at what quantity you want to produce them. However, when it comes to certain business activities, industries, etc. the government does intervene. This is actually a good thing, because it protects you as a consumer from illegal business activities. As a business owner, though, it presents some unique challenges. In this article, I will address three important financial and legal considerations: business licenses, insurance, and permits.
Business Licenses
A business license is a formal document issued by the federal, state, and/or local government that grants you the right to sell goods and services within a specified location.
At the federal level, business licenses are usually only required for businesses that import/export products and/or sell federally regulated products like alcohol. However, there are many more reasons why you may need to obtain a federal license, so check the SBA’s License and Permit guide for more information.
At the state level, many states require you to obtain a standard business license, while others only require a business license if you operate in certain industries or meet certain requirements. Your Secretary of State’s website is the best place to find information specific to your business. If your business engages in any of the following activities, you may expect to obtain certain state licenses:
- You operate in an industry that requires a professional license, like healthcare, legal services, real estate, and so forth.
- You sell taxable goods and/or services. If this is the case, you must obtain a sales tax license (AKA seller’s permit) to collect sales tax on purchases made by customers. You must then remit (pay) the total amount of sales tax you collect to your state government at the time intervals it specifies. Be aware that you may even be required to apply for a seller’s permit in a different state from where your business is located, simply because you sell products and/or services to consumers in that state.
- You operate in an industry that requires you to meet certain health and safety protocols, like childcare services and restaurants.
Even if your business does not meet any of the above descriptions, still consult your State’s Secretary of State website.
At the local level, your local government may require a general business license or licenses specific to certain industries or activities. Visit your local government’s website for information specific to your business’s location.
Business Insurance
Just as car insurance protects you from unexpected collisions or issues with your car, business insurance helps protect you from unexpected losses or damages caused by natural disasters, lawsuits, property damage, malpractice, fire, etc. Business insurance may be required for certain types of businesses, depending on the state and local jurisdiction you operate in. However, if you employ anyone, you must have the following, according to the SBA:
- Workers’ compensation
- Unemployment
- Disability insurance
Once you have purchased any insurance that you are legally required to obtain (whether by the federal, state, or local government), you can think about purchasing other types of business insurance. The SBA recommends you take out business insurance for situations where you would not be able to pay the entire fee by yourself. For example, if you operate a restaurant, it is unlikely you would be able to cover the cost of your restaurant burning down. In this case, it may be wise to take out commercial property insurance.
The SBA spells out six common types of business insurance in an article which you can find here. Consider these a good starting point, but certainly conduct your own research. Since business insurance can be expensive, the SBA recommends shopping around for the cheapest policy that fits your needs.
There are essentially three ways to obtain the business insurance policies that you need:
1. Self-Service: this is the quickest way to obtain business insurance. You simply visit a company’s website or call them, and the decision for which policies to buy is yours entirely. Liberty Mutual is probably the most famous example of a self-service insurance agency.
Pros: Convenience, efficiency, and accessibility
Cons: Technical issues, no professional oversight (high potential for errors), and limited personal interaction
2. Captive Agent: a captive agent is an insurance agent who works for a specific insurance agency. They are a local insurance agent who are “captive” to their respective insurance agency. That means they will only provide insurance policies from the company they are captive to. Allstate and State Farm are popular examples.
Pros: Consistent & comprehensive customer service (particularly attractive if you operate in multiple areas), expert product knowledge, personalized support, and exclusivity (captive agents can sometimes offer exclusive rates and discounts)
Cons: Limited options (you are almost guaranteed to overpay) and a lack of coverage in areas the insurance company does not provide coverage for
3. Independent Insurance Agent: an independent insurance agent is essentially an insurance consultant. They have relationships with multiple insurance companies and try to find the best mix of quality and price for your business needs. Independent insurance agencies range in size, but perhaps the largest in the US is Alliant Insurance Services.
Pros: Greater range of options (better likelihood of high-quality, low-cost mix of policies), relatively low conflict of interest, personalized support, and flexibility (since insurance policies fluctuate in price, you may be able to change policies each year to keep your costs at a minimum)
Cons: Inconsistent (quality of your policies depends heavily on quality of the independent agent), complexity (you are dealing with various insurance companies), and lack of exclusivity
Business Permits
A permit is a government authorization, typically issued by your local government, that authorizes you to perform specific business activities in a jurisdiction. There are many different types of permits, and you should consult with your local government for specific information. However, I would like to briefly outline some of the main permits you should be aware of:
Location and Land Use Permits: include permits relating to where your business can operate and how your business can use land. Includes zoning, building, sign, environmental, and home occupation permits.
Health and Safety Permits/Licenses: include permits that certify your business follows local health and safety regulations. Includes food service licenses, health department permits, fire department permits, OSHA compliance certificates, and alcohol licenses.
Special Federal Permits and Licenses: include permits and licenses that relate to federally regulated products and services. I already briefly touched on these in the “business licenses” section. These include Federal Firearms License (FFL), Federal Communications Commission (FCC) License, U.S. Department of Agriculture (USDA) Permit, Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) Permit, U.S. Fish and Wildlife Service Permit, and many more.
Because applying for licenses and permits can be expensive and time-consuming, it is understandable that you want to limit the number of permits and licenses you obtain to the minimum legal amount. However, consider the credibility and competitive advantage that your business would gain by applying for optional, but relevant, licenses and permits.
Please also note that most business licenses and permits expire within a certain time frame, so you will need to renew these before their expiration date. However, renewing licenses and permits are typically much less expensive and time-consuming than the initial application. That being said, there may be some ongoing costs associated with fulfilling the requirements of your business permits and licenses, so it is important to keep these in mind, too.
The Accounting Geek 
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