Ask the Cubicle Expat: Do I need a business license?

I get asked this a lot — by friends, students, people on the street — so I’m posting my answer here. For the sake of this post, let’s assume we’re talking about you running a sole proprietorship, which is legalese for “one-woman business.” You’re not an Inc. or an LLC; you didn’t pay a lawyer to “get incorporated.” You’re just someone who woke up one day and decided to start selling your creative talents in exchange for cold hard cash. (Let’s also assume you’re not embarking on a venture that requires a professional license and letters after your name — MD, DC, ESQ, and the like.)

The IRS defines a business (as opposed to a hobby) as a venture you’re trying to be profitable in. So if you’re trying to make money, land customers, promote your enterprise, then, yes, Virginia, you are a business owner. And if you’re a business owner, depending on what city and state you live in, you may need a business license. Check with your city and state’s Department of Licensing websites to see what their rules and regs are.

For instance, I live in a burb of Seattle. I have a state business license for my freelance writing and editing business, which cost me a one-time fee of $15 almost a decade ago. In exchange, I get to file an annual tax return (by January 31st) with the state, whether or not I owe any taxes. (Kindly, Washington state doesn’t start collecting taxes until you clear “making a pittance” level.)

When I lived in Seattle proper, I had a city business license that ran me about $80 a year (though I believe it’s since gone up to $90). I had to file an annual return with the city, too, but appreciated the fact that Seattle didn’t tax you on business income if you grossed under $50,000 that year. In my new little town, there is no business license required for freelance writing, so that’s one less bill and form I have to worry about for the time being. That said, if I wind up doing any business in Seattle, the city of Seattle will expect me to have a business license and pay any taxes owed there.

I realize this may not answer your question if you’re, say, only making $5,000 a year in freelance income. I asked my Friend the CPA about this 15 years ago when I was just starting out and had no money to spare for a business license. While Friend the CPA couldn’t legally tell me that there was a decent chance no one would notice if I didn’t get a business license at that point in time, he seemed to imply it. But that was 15 years ago, and I’m not giving you actual legal or accounting advice, remember?

If you’re equally baffled by the whole business license question, run it by your tax preparer and see what s/he thinks. If you don’t have a tax preparer, get one. Also, call your city and state’s Department of Licensing and see what information you can glean from them. To license or not to license when you’re just starting out is very much a gray area, so it may just come down to what you feel most comfortable with. Even in my lean years, I was most comfortable with getting the damn license so I didn’t have to worry about whether the city was going to “catch me” and charge me fees retroactively.

Some other stuff to be aware of:

• If you work from home, you should also suss out what your local zoning regulation is — especially if you have clients coming into your home, which the neighbors are likely to notice. If you live in a community with a particularly militant local government and your reside in a building zoned as “residential,” you may have a problem working from home. Again, your tax preparer or a friend in law school may be able to advise you on this.
• If you live in California, you may want to read this. While I believe this article is a couple years old, I would still want to suss this situation out before doing business in the Golden State. Oakland-based Media Alliance, an excellent advocacy group for freelance media types, will likely have more information on the matter.
• If you work with food, kids, construction materials, or people’s health, you will certainly need to scope out your local licensing situation. You may also need to brush up on local requirements for permits and insurance in your line of business, but that’s a whole other can of logistical worms.

Moral of the story: When it comes to your livelihood and all the legal crap that goes with it, don’t linger in the dark, or denial, or rebellion too, too long. It may come back to bite you in the ass, in the form of retroactive fees and taxes, plus interest.

If you, too, have a question you want the Cubicle Expat to answer, send it my way. Let me know if you want me to use your name and link to your site, or if you want to remain anon. I’ll try to answer at least a question a week.

3 comments January 29th, 2007