If you’re seriously considering taking up a career in freelancing, you’ll also have to factor in the operational side of your operation. One common concern is whether or not you’ll need to apply for a business license. The answer is: it depends.
You’ll need to check with your local chamber of commerce or government agency. They'll be able to provide more details about if you need licensure to comply with city regulations. As you launch into your voyage of discovery, we’ve covered some of the basics.
What is a business license?
A business license is a governmentally issued permit to legally conduct commerce on local, state, or federal levels. It illustrates that you’re a) qualified to perform your professional duties (keeping the public safe) b) adhering to local regulations, like zoning.
Business licenses are important, as it allows the government to ensure that companies are running above-board and aren’t abusing the public. It also makes it easier for the government to track and monitor your cash flow, so you can better report your taxes.
The license you apply for may vary depending on where it was issued or the type of business you’ll be conducting. Before you apply for your license, you’ll need to register your business entity. While there are lots of different types of organizational structures, let’s focus on the two most common structures that apply to freelancers.
A sole proprietorship is well-suited to one-person businesses. It means that the business will be labeled as your name, and there will be no legal distinctions between you and the business. The benefits of selecting a sole proprietorship are:
- You’ll get to pocket all of the business profits.
- You often don’t need to apply for a license
- You can reformat the business however you see fit and it’s easy to make changes.
The primary downside of sole proprietorships is the concept of ‘personal liability.’ As there is no legal distinction between you and the business, you’ll be personally responsible for any professional mishaps the occur. That means your personal assets - like your house or car - are at risk in the face of legal consequences. Sole proprietorships are good for one-person businesses that have low risk of legal disputes.
Limited Liability Company (LLC)
An LLC is a hybrid between a sole-proprietorship and corporation. The biggest difference is the legal protection it affords to business owners. Benefits are:
- You’re not personally at-risk for the company’s debts and liabilities.
- You have flexibility in changing your federal tax classification
The costs are that
- An LLC is more difficult to file for.
- Your liability protection is limited.
- You’ll end up paying more in taxes than you would for a sole proprietorship
If you’re planning on growing in to a bigger company with coworkers, an LLC might be the right choice for you. It’s also better suited to freelance businesses that do high-liability work.
Once you’ve made the decision about which format your business will fall under, you can take a closer look at the types of business licenses.
DBA (“Doing Business As”)
A DBA is a legal requirement to be able to run your operation under a name that is not your registered, legal name. If you were a sole proprietorship, and your name was Kelly Jones, it would allow you to change the name to something aside from Kelly Jones.
City or county licenses
If you choose to use your own name for your freelance business, you won’t need a DBA. You could simply get a city or county business license. This is essentially a tax-revenue collecting permit that allows you to conduct business in the area.
Again, depending on your area, you may or may not need licensure. If you are required to get a license, you just have to go to the office, fill out some forms and pay the fee, which can vary anywhere between a few dollars or a few hundred dollars (depending).
The difference between whether you need a license or not often depends on the type of operation you are running.
When consulting with your local chamber of commerce, be sure to ask if you’ll need a permit to work from home (unless you have an office or coworking space). This is because some cities might have zoning laws in place. Zoning determines what particular areas of land are meant to be used for (ex: these four blocks are exclusively for homes, this one block is for business).
If you want to run your business from your home, it’s possible there are some local regulations preventing that (resulting in penalty fees, if caught). Look into the regulations for your area and see if you’ll need to apply for a zoning variance permit.
These are just a few examples, but remember that depending on your local government regulations and type of business, you might need to apply for an alternative license or permit.
Often times if you’re working from home doing services like marketing or consulting services, you’re unlikely to need a permit.
What if I don’t get a business license?
If a business license is legally required in your area, don’t put yourself at risk! Playing dumb or feigning ignorance won’t get you a pass: you will still be charged a penalty fee and it can escalate if they find out you’ve been dodging licensing for a while.
The government has the ability to charge you retroactively if they find out just how long you’ve been running an unlicensed business.
The heft of the penalty depends on the district: it could be $20, or it could be as steep as $500. As a small firm, a $500 fine could really set you back. In more extreme circumstances, it could result in lawsuits, arrest, or closure of your business where they seize your assets.
Luckily, a business license is very affordable. If you do need one, it’ll cost somewhere between $34 to $100, depending on your city or county. You may have to pay this on an annual basis or as a one-time fee.