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Do I Need a Home Business License?

The Legal and Ethical Requirements

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Do I Need a Home Business License?
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"Do I need a home business license?" is a question I often receive, and unfortunately, it results in a complicated answer. Basically, the answer is dependent on what your city and state requirements are -- and more importantly -- whether or not you feel it ethically necessary to report your home business to your city.

If you want to operate under the letter of the law, it is likely you will need a general business license. To find out whether or not this is true, you need to contact your city hall. For example, when registering my home business, my city hall indicated that any home businesses earning income outside an employer/employee relationship (including freelance writing) requires at least a general license.

The Ethics of Registering Your Home Business

Now here is where the ethical discussion comes in. For many businesses, you could likely get away with not applying for a license. Things like consulting, freelancing, music lessons may be difficult for the city to track. Businesses involving in-house daycare and food preparation require additional licensing and may be easier for the government to track (especially if you have tattling neighbors). My advice? Always register. By doing the right thing and following the letter of the law, you can hold your head up high and not worry about whether or not Uncle Sam may come knocking with back-fees and penalties.

For my situation, I have a freelance writing business and a marketing consulting business. For both, my city required that I apply for what they call a "Home Occupation Permit", basically their general business license. The fee was only $25 per year, however, this dollar amount will vary by city. In addition, there was an application fee of $5, this fee too will vary. I was out $30, but it was well worth the peace of mind. Not every business will fall under the "general" category and some may require specialized permits and other licenses. Your city hall will be able to direct you appropriately.

Benefits of Having a Home Business License

Properly registering your business offers multiple benefits. In addition to your conscience resting easier, a license offers validation and gives you the documentation necessary to apply for a business bank account and business loans if needed.

Another Useful Registration

There is one other license you may want to consider applying for. It is a Federal Employer ID Number (FEIN), which is basically like a social security number for a business. It is free to apply for one. For sole-proprietor businesses, you don't need one, the main reason you would need one is if you decide to set-up an LLC business structure to funnel all your business income under or if you aren't too keen in passing around your social security number to clients or suppliers who may require that ou fill out a W-9 tax form. (W-9's are often collect in order to prepare a 1099 tax form). If an FEIN seems much too serious for your small home business, no problem. You would just use your Social Security Number in place of the FEIN, and at tax time, fill out a Schedule C on your personal tax form to detail your 1099 earnings. (It is important to note you must report any 1099 income of $600+ in a year on your taxes.)

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