The Importance of Doing Your Research for a Business License
By Teri Mayor, COGENCY GLOBAL INC.
Back when our kids were young, a friend and I dreamed up an idea for creating at-home children’s birthday parties for busy parents and decided to give it a try. We spent hours figuring out a business plan, designing a website and planning the party themes. We also spent hours on a much more frustrating activity, trying to determine whether we needed a business license or permit to include a home-baked and decorated birthday cake as part of the festivities. We searched online, called the state health department, county agencies and town agencies. Again and again we got no answers, just a referral to another person to call. We didn’t fall into a known category, and no one seemed to be able to answer our question -- would we need a “regulation kitchen” in which to bake our cakes? Finally, we got an answer. We could make our cakes at home and bring them along as long as we didn’t use whipped cream frosting. Hurray! Buttercream frosting it was.
This experience taught me two things. First, figuring out which business licenses and permits are required can be difficult! Second, as tempted as you are to say the heck with it after your third or fourth hour of research, it’s important to figure out what licenses and permits are required. Had we not known about the whipped cream rule, we would have offered that as an option. Giving parties to the general public and offering this option on our website, it was likely the county health department would discover the issue and levy fines or penalties, or at the least, ask us to change our business model, generating a fair amount of additional work to re-vamp everything. Even if we didn’t get caught, our lack of a properly outfitted kitchen could have been used against us if we were ever sued.
Business License Requirements Vary by Location
My current role as the product manager for our business licensing services has taught me one important thing I never even considered then. It was our local county that gave us the whip cream rule, but we gave many parties in neighboring counties. It never occurred to me to determine if their rules were the same, I just assumed they were.
Oversights like this are much more common than you might think for successful businesses operating in many states and counties. While architecture and engineering firms, insurance agencies and pharmacies are usually very aware that there are licensing requirements for their professions in almost every state, it is the local tax registrations and business licenses that often trip companies up. Each location has its own rules. In some cases, a business needs a license if it has a brick and mortar presence; in other cases, a sales associate working from their home can trigger the requirement. A business that operates in a state that doesn’t have many local licenses may assume, as I did, that they don’t need to worry about licensing when they start up in another location. That could be a dangerous assumption to make.
The Consequences of Doing Business without the Proper Licenses
Lack of proper licenses can create major issues for a business. Here are some key difficulties:
Fines and Penalties: As local governments get leaner, they are getting much more serious about enforcement. Many local governments are using the internet to seek out businesses operating in their jurisdiction and comparing them against their licensing lists, issuing fines and penalties to businesses that are not compliant.
Bad Public Relations: The internet can also be used by the general public to embarrass or create difficulties for businesses. As more and more license data become available online, it is not unheard of for a disgruntled customer to do their own research and publicly post about a business’s lack of proper licensure.
Business Closure: A business that lacks proper licensure may need to close or stop offering the service or product for which it lacks a license. There are all sorts of potential costs to the business here, from lost business, to marketing and advertising dollars wasted to bad PR, if customers face a locked door and a sign about closure due to lack of a license.
Business Cost: Even if none of these things happen, businesses can face unintended costs if they set up a business model or product offering that does not agree with regulations everywhere they are doing business. For example, an engineering firm may want to offer an Employee Stock Ownership Plan. However in some states, regulations for the firm’s engineering license require that only licensed engineers can own shares in the company. If the company converts to an ESOP first and then discovers the issue, it will likely face a lot of legal costs to address the problems created by this action.
The Quick and Easy Way to Research Business License Requirements
A reputable company with experience researching these issues can be hired to determine what licenses are required based on a company’s specific business model. While the service is not free, it can be less expensive than the time cost of figuring it out yourself. In either case, the cost of doing the research ahead of time and finding out what you need to know (“Don’t use whipped cream frosting!”) can save a company a lot of headaches and difficulties in the long run.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.