Business License and Permits

What You Need to Know to Start Your Business

Small business owners are no strangers to government regulations. There are many requirements that businesses must be aware of and comply with, including business license and permit rules.

Most businesses must obtain licenses or permits, so it is important for each business to know which ones it needs. Business operations are regulated at the federal, state, and local levels. Each may have its own licensing and permitting requirements—and fees—depending on the particular business’s activities, industry, and location.

Failure to comply with these regulations can lead to serious consequences, including forced closure in some circumstances. To operate legally and avoid risks, owners must identify and obtain all licenses and permits required for their business.

Licenses Versus Permits: Understanding the Difference

Licenses and permits can be issued at the local, state, and federal government levels. Although the terms are sometimes used interchangeably, licenses and permits are not identical.

Licenses

The US Chamber of Commerce explains that a government agency issues a license as permission to do something or use something.[1] For example, the Department of Motor Vehicles issues driver’s licenses. Licenses are also issued to professionals such as doctors, lawyers, cosmeticians, plumbers, and electricians.

Licenses generally have terms and conditions attached to them. Typically, the government only issues a license after the applicant has taken a test that demonstrates their aptitude in a particular area and their understanding of applicable rules and regulations. Licenses are granted indefinitely (subject to renewal) but may be canceled if the license holder breaks the rules.

Permits

Permits can be thought of as a type of license that allows a business to engage in a specific activity often related to public safety. Governments may issue permits after an inspection, such as a health department inspection of a restaurant or a fire department inspection of a commercial space. The issuance of the permit shows that the business is compliant with the relevant laws or local ordinances.

Not all permits require an inspection. Some, including a sales (i.e., seller’s) permit, may simply involve registering with the appropriate government agency (e.g., the Taxation and Revenue Department) and obtaining an identification number for sales tax payments. Like licenses, permits can be revoked for violations of terms.

Determining License and Permit Requirements

Most small businesses need to acquire a combination of licenses and permits from both state and federal agencies.[2]Actual requirements vary by the type of business, its location, and government rules.

If your business activities involve an industry that the federal government regulates, such as agriculture, alcoholic beverages, aviation, fish and wildlife, and mining and drilling, you will need to obtain a license or permit from the relevant federal agency. However, you may need to get a license or permit from a state agency if your business activities are among the wider scope of industries regulated by the states, such as construction, dry cleaning, restaurants, and retail stores. The sale of alcoholic beverages and some other business activities may be regulated at both the federal and state levels.

Some licenses and permits must be obtained from local government entities, such as the city or county. General business and operating licenses, health and environmental permits, and signage licenses or permits are among the local government certificates a business may require.

How to Apply for Business Licenses and Permits

After determining which licenses and permits you need, the next step is to submit applications to the correct agencies. Along with sending paperwork, you may need to pay a fee.

Business licensing and permitting fees differ across states and industries. The cost may vary widely: for example, the US Department of Agriculture charges $120 for an Animal Welfare Act (AWA) license that lasts three years,[3] but the Bureau of Land Management has a filing fee of $10,900 for permits to drill on federal oil and gas leases, valid for two years or until the lease expires.[4] Most states charge around $50 to $200 for a new business license[5].

Business License and Permit Compliance

Noncompliance with license and permit requirements could lead to civil fines, criminal charges, and the closing of your business. Home-based businesses should assume unless informed otherwise that they are subject to the same regulations as brick-and-mortar businesses.

Failure to renew a business license on time could lead to a small late fee, while on the other end of the spectrum, a doctor caught practicing medicine without a license could be criminally prosecuted and have their business shuttered. It is in your best interest to handle licenses and permits by the book. Once you receive the proper authorizations to operate, it is important to keep a list of renewal dates, since it is usually easier to renew a license or permit than to apply for a new one.

To make sure your business starts out with all the right licenses and permits—and remains in compliance—consider working with a local attorney on research, applications, management, and renewals. Do not let a failure to acquire the necessary license or permit derail your business plan. Get in touch with our small business lawyers to find out how we can help.

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[1] Starting a Business? A Guide to Business Licenses and Permits, US Chamber of Com. (Feb. 25, 2019), https://www.uschamber.com/co/start/startup/business-licenses-and-permit-guide.

[2] US Small Bus. Admin., Apply for licenses and permits (May 26, 2023), https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits.

[3] USDA, Animal and Plant Health Inspection Serv., Licensing Rule (Mar. 6, 2023), https://www.aphis.usda.gov/aphis/ourfocus/animalwelfare/sa_regulated_businesses/licensing-rule/licensing-rule.

[4] Bureau of Land Mgmt., Annual Statutorily Required Increase in Filing Fee for Processing Fiscal Year 2022; Applications for Permit To Drill, 86 Fed. Reg. 58095 (Oct. 20, 2021), https://www.govinfo.gov/content/pkg/FR-2021-10-20/pdf/2021-22777.pdf.

[5] Dana Miranda et al., How to get a Business License in 5 Steps, Forbes Advisor (May 3, 2023) https://www.forbes.com/advisor/business/how-to-get-a-business-license/.

Understanding Your Business Liabilities and Assets

Assets, liabilities, and equity are accounting terms that every small business owner should be familiar with. They are included on a business’s balance sheet, providing a snapshot of financial health.

A balance sheet shows a company’s assets and liabilities at a given time and how money is flowing in and out of the business. This information is useful to owners, lenders, and investors as a decision-making tool.

Only C corporations are required by the Internal Revenue Service (IRS) to complete a balance sheet as part of their annual tax return; but preparing a balance sheet at the end of every month or quarter—or at least once per year—is an essential part of running a business.

Assets, Liabilities, and Equity on a Balance Sheet

The balance sheet equation states that a company’s assets must equal its liabilities and equities: Assets = Liabilities + Equities.

Assets are resources that a business owns. They represent current or future economic value. Liabilities are debts that a business owes. Equity is the amount left over when the total liabilities are subtracted from the total assets.

Assets

An asset is a positive on the balance sheet because it generates, or has the potential to generate, income for a business. Assets can be broken down into current, noncurrent, and investment assets.

●      Current assets are short-term assets that can be converted into cash (i.e., liquidated) within the next year, such as inventory, outstanding invoices, cash, and cash equivalents.

●      Noncurrent assets are long-term assets that a company does not expect to convert into cash in the short-term, including production equipment, intellectual property, and real estate.

●      Investment assets have the potential to generate profits or consistent income for a company. Rental property, mutual funds, stocks, and savings accounts are examples of investment assets.

In addition, assets can be divided into tangible or intangible assets. Tangible assets are physical items such as equipment, inventory, land, buildings, and supplies. Patents, investments, stocks and bonds, and trade names fall into the category of intangible or nonphysical assets.

Liabilities 

Liabilities are a negative on the balance sheet because they represent money that the company owes to others. Like assets, liabilities can be categorized as current and noncurrent, depending on when they are due.

●      Current liabilities are any debts due within a year. They include accounts payable, debt financing, rent and utility payments, and payroll.

●      Noncurrent liabilities are debts due in more than a year, such as deferred compensation and loans paid in increments.

Obligations to provide goods or services in the future can also be liabilities. Current liabilities plus long-term liabilities amount to a company’s total liabilities.

Equity

After the value of all assets is calculated and the value of all liabilities is subtracted, the amount that is left over is equity.

Equity measures the amount of money that a business’s investors would receive if the business liquidated its assets and paid off its liabilities. For a small company such as a sole proprietorship or limited liability company, this amount is referred to as owner’s equity. Larger companies structured as corporations may refer to it as shareholder or stockholder equity.

Owner’s equity in a sole proprietorship represents the amount of cash and property the owner has invested in the business and the business’s earnings over time, minus any withdrawals. Shareholder equity in a corporation generally represents the value of corporate stock and undistributed amounts (retained earnings).[1]

Equity is not always positive. If a business’s liabilities are greater than its assets, equity will be negative.

Why Balance Sheets Are Important to Small Businesses

Balance sheets help business owners understand the financial health of their business. Increasing equity is a sign that the business is doing well. Declining equity could mean that it is time to make changes. For instance, business owners could decide to pay off debts to reduce liabilities on the balance sheet. The balance sheet can also provide data crucial for tax calculations, such as asset depreciation and labor costs.

Owners are not the only ones who might look at the balance sheet. Lenders, investors, and buyers may also look at it when assessing a company’s financial position.

A balance sheet, however, is only as accurate as the information and calculations used to generate it. Attention to detail is paramount in accounting. Mistakes can create an inaccurate picture of the business’s finances, leading to compounding distortions and bad forecasting.

You do not have to be a professional accountant to understand business assets, liabilities, and equity. However, you may want to consult with an accounting professional who can create balance sheets for your business. An accountant can also audit a balance sheet, prepare income and cash flow statements, and assist with tax preparation, securing funding, succession planning, growth strategies, and more.

Our attorneys assist small businesses with legal services and can refer you to reputable, local certified public accountants we have previously worked with. Call or contact us if you would like to set up a consultation.

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 [1] Barbara Weltman, 5 Things to Know About Your Balance Sheet, Small Bus. Admin. (Sept. 19, 2019), https://www.sba.gov/blog/5-things-know-about-your-balance-sheet; Tim Stobierski, How to Read & Understand a Business Sheet, Harvard Bus. Sch. Online (Apr. 2, 2020), https://online.hbs.edu/blog/post/how-to-read-a-balance-sheet.

SECURE 2.0 ACT

How It Affects You and Your Retirement Account Beneficiaries

On December 29, 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0 Act). The previous SECURE Act in 2020 made several changes to retirement planning:

●      It increased the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age.

●      It eliminated the age restriction for contributions to qualified retirement accounts.

●      It requires that most designated beneficiaries withdraw the entire balance of an inherited retirement account within 10 years of the account owner’s death.

Eligible Designated Beneficiaries Exempt from the 10-Year Rule

The SECURE Act provided a few exceptions to the mandatory 10-year withdrawal rule with a list of eligible designated beneficiaries:

●      Spouses

●      Beneficiaries who are not more than 10 years younger than the account owner

●      The account owner’s children who have not reached the age of majority

●      Disabled individuals and chronically ill individuals

New Provisions in the SECURE 2.0 Act

The SECURE 2.0 Act made quite a few enhancements to clarify the original legislation. Several of the key enhancements are summarized below: 

●      It raises the RBD age for RMDs to 73 in 2023 and 75 by 2033.

●      It decreases penalties for not taking RMDs to 25 percent of the RMD amount and 10 percent of IRAs if corrected timely.

●      Employees will be automatically enrolled in 401(k) and 403(b) plans but may opt out within 90 days.

●      Higher catch-up contributions are allowed for participants over 50 ($7,500 in 2023).

●      There is more flexibility in annuity payments paid from qualified retirement plans.

●      Early distributions are permitted for long-term care contracts without penalty.

●      Qualified charities can be named as remainder beneficiaries after the death of a disabled or chronically ill beneficiary without disqualifying the trust as a see-through trust.

●      Plan sponsors may match contributions made on student loan repayments on the same vesting schedule as elective deferrals, effective 2024.

●      529 plans maintained for at least 15 years may be rolled over into a Roth IRA with a $35,000 lifetime limit, effective 2024.

Exceptions to the Early Distribution Rule

The SECURE 2.0 Act allows exceptions to the 10 percent early distribution excise tax, including the following:

●      Qualified births and adoption expenses

●      Terminally ill individuals

●      Federally declared disasters

●      Emergency personal expenses

●      Domestic abuse victims

The new provisions and exceptions in the SECURE 2.0 Act may change the decisions you have made for your intended beneficiaries and alter the path to achieving your long-term goals.

Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under the SECURE Act and SECURE 2.0 Act, the shorter 10-year time frame for taking distributions will accelerate income tax due, possibly bumping your beneficiaries into a higher income tax bracket and causing them to receive less of the funds in the retirement account than you may have originally anticipated. Eligible designated beneficiaries exempt from the 10-year rule may still have the opportunity to benefit from future retirement plan growth.

Your estate planning goals likely include more than just tax considerations. You may also be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. In order to protect your hard-earned retirement account and the ones you love, it is critical to act now.

Review Your Revocable Living Trust or Standalone Retirement Trust

We may have addressed the distribution of your retirement accounts in your living trust, or we may have created a retirement trust that would handle your retirement accounts at your death. Your trust may have included a conduit provision, which requires that retirement distributions be immediately distributed to or for the benefit of the beneficiaries (rather than being held in trust). With the SECURE Act’s passage, a conduit trust structure may not be the best choice any longer because the trustee will be required to distribute the entire retirement account balance to most types of beneficiaries within 10 years of your death (which, as discussed above, can create an income tax headache for the beneficiary).

Under the current rules, if a person dies prior to their required beginning date for RMDs, then designated beneficiaries will not be required to take out RMDs during the 10-year payout period (but would need to take full distribution by the end of the 10-year payout period). However, if the person died after their required beginning date, the beneficiary must continue to take out RMDs on an annual basis (with full distribution at the end of the 10-year payout period). We should discuss the benefits of an accumulation trust, an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries.

Consider Additional Trusts

For most Americans, a retirement account is the largest asset they will own when they pass away. If we have not done so already, it may be beneficial to create a trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary. A trust is a great tool to address the mandatory 10-year withdrawal rule under the SECURE Act, providing continued protection of a beneficiary’s inheritance.

If you have beneficiaries with a disability or chronic illness, you may want to consider a special needs or supplemental needs trust. Beneficiaries are exempt from the mandatory 10-year payout rule, giving them more time for the retirement account to grow tax-deferred.

 Review Intended Beneficiaries

With the changes to the laws pertaining to retirement accounts, now is a great time to review and confirm your retirement account information. Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation is filled out correctly. If your intention is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary. If you want the primary beneficiary to be an individual, they must be named on a beneficiary designation form. You should ensure that you have listed contingent beneficiaries as well.

If you have recently divorced or married, you will need to ensure that the appropriate changes are made to your current beneficiary designations. At your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been.

Other Strategies

Although these new laws may be changing the way we think about retirement accounts, we are here and are prepared to help you properly plan for your family and protect your hard-earned retirement accounts. If you are charitably inclined, now may be the perfect time to review your planning and possibly use your retirement account to fulfill your charitable desires.

A charitable remainder trust can use annuity and unitrust payments to mimic the “stretch” provided by using life expectancy. Assets are funded into the trust and then liquidated or sold by the trust. The money from the sale is then invested to produce a stream of income. The sale avoids capital gains tax at the trust level because the trust is liquidating the account and is tax-exempt. However, the noncharitable recipient of the income stream will still be responsible for income tax on the distributions. In contrast, you may distribute your entire retirement asset directly to a charity, and they will not have to pay tax on the income from the plan. Additionally, If you have a significant estate, there may be an estate tax charitable deduction.

Following the recent changes to the SECURE Act, you may be concerned about the amount of money that will be available to your beneficiaries following your death and the impact that the potential accelerated income tax may have on that ultimate amount. We can explore different strategies with your financial and tax advisors to infuse your estate with additional cash upon your death.

Give us a call today to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act and SECURE 2.0 Act.