CORPORATE TRANSACTIONS & COMPLIANCE BLOG

Five Common Misconceptions about Business Licensing

By: Teri Mayor, COGENCY GLOBAL INC. on Tue, May 27, 2014

1. Licensing requirements do not vary much from state to state.  When beginning business in a new state, I can assume that the requirements will be about the same as in my home state.  

False.  Actually, there can be a great deal of variation in requirements among the states and this can trip up a company as it expands. Often, a business that is engaged in a non-regulated industry does not consider that there may be local licensing requirements in a new state if there are no such requirements in its home state. So, a company that has been doing business in a state like New York, where local general business licenses are not usually needed can run into trouble when setting up shop in a state like California, where requirements for town and county general business licenses abound.

Business Licensing2. Filing the Application for Authority to do business in a particular state means I am fully registered and licensed.

False.  In most states, the Application for Authority will register a corporation or other business entity with the Secretary of State (or its equivalent) only. Separate filings must be made to register the entity for income or franchise tax, to collect sales tax, to withhold payroll taxes and for general business licenses. While some states, like New Jersey, have a consolidated form that allows an entity to complete several different types of registrations with a single filing, this is more an exception to standard practice than the rule.

3. A company only needs a local license if it has a physical location in a town or county.

False.  In some states, local licenses or sales tax registrations may be required even if the company does not have a physical presence. If an entity is engaging in business in a particular town or county, licensing may be required. Also, an employee working from her home may trigger the need for a home-based business license.

4.  There are clear and simple rules that a company can use to determine whether it should register to do business or pay taxes in a particular state.

False.  The concept of what constitutes “doing business” in a particular state is a complex one, and cannot be answered by non-attorneys or even the officials in charge of registration. Whether or not a company’s activities create nexus or the need to register for and pay taxes is
also very complicated. In both cases, the company should consult with an attorney or CPA, who can review the proposed activities in a particular state and determine whether the company should file an Application for Authority to do business or tax registration.

5. Once licensed, it is safe to rely on receiving renewal notices in the mail to maintain a company’s licenses and registrations.

False.  Not all authorities mail out renewals, especially when the registration/renewal process can be handled online. Even when they do, reminders may get emailed to an employee that is no longer with the company, lost in the mail or sent to an incorrect address, which can result
in an important renewal getting missed. Fines, penalties and missed business opportunities can all result from falling out of compliance. It is important to have an in-house or commercial tracking system to ensure licenses are renewed in a timely way.

There is a great deal of variation in licensing requirements for businesses across the U.S. As a business grows, it should not make false assumptions about what will be required. When beginning business in a new state, it is important to research all licensing and registration requirements to ensure compliance. After that, the business must make sure it is properly tracking and managing the required license renewals and reports.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: Business Licensing