What Happens if a Business Operates Without the Necessary Licenses or Permits?

Operating a business without the required licenses and permits can result in serious legal and financial consequences, ranging in scope from fines to the business being shut down, or even criminal charges for owners.

Most business owners understand that they need to obtain licenses and permits to legally operate, but it’s not always easy to know which licenses you need, how to get them, and how to keep them up to date so that your business remains in compliance. Unfortunately, that raises the possibility that you could end up facing penalties for violations of which you weren’t even aware.

It’s not unheard of for a competitor or disgruntled customer to report a business for operating without a license or permit the owner didn’t realize was required.

In addition to discussing the potential consequences of operating a business without them, this article will explain some differences between business licenses and permits, what types of licenses and permits your business may be required to have, and how to apply for them and keep them current.

Consequences of Not Having Required Licenses and Permits

In addition to the consequential penalties I’ve already mentioned, operating a business without the required licenses and permits can result in allegations of fraud, loss of credibility, and an undermining of trust with stakeholders. It also can leave your company open to lawsuits and may cause a court to rule against you if you are sued.

An unhappy customer could take a business to court, alleging that operating without a license constitutes fraudulent activity. Or you could be sued for another reason and find that the lack of licensing causes the court to rule against you without considering other factors in the case.

States and municipalities have different rules for dealing with unlicensed businesses, but often deal with them quickly, particularly when responding to a complaint or report of a violation.

Most commonly, fines and penalties will be issued to a company that is not in compliance with requirements regarding business licenses and permits. The severity of fines normally varies depending on the seriousness of the violation. A business that neglects to renew a permit or license, for instance, would probably receive a lower fine than one that’s been operating without any licenses for years.

If fines are not paid within a stated time, authorities could elect to shut down a business, a move that might seem extreme, but does occur.

Failing to obtain a license can in some cases result in criminal charges, such as if a doctor practices medicine without being properly licensed. Other labor sectors, including construction and food service, also may face severe penalties because of safety concerns.

Another consequence of not keeping licenses and permits up to date is that it can cause a business to be unable to get a Certificate of Good Standing from the state, or to lose its status of good standing. While a Certificate of Good Standing is not legally required, companies that don’t have one could find it difficult to obtain funding or loans, open a business bank account, expand your business into other states, or enter into contracts and agreements.

As you can see, failing to get the licenses and permits you need can have very negative results for your company, possibly leading to disruption of business, lost revenues, costly fines, and possibly even jail time.

Business Licenses vs. Permits

I’ve been using the words “licenses” and “permits” rather interchangeably, but there are differences between the two. Generally, a business license gives an entity permission to do something, while a permit focuses on safety issues. For example, someone may need a business license to own and operate a lawn care company, and a permit to store the chemicals used to treat lawns.

The U.S. Chamber of Commerce cites two factors in the difference between business licenses and business permits: requirements needed to obtain a license or permit, and the purpose for obtaining them.

To obtain a business license, you’re likely to have to submit a registration form to the appropriate agency and in some cases, pass a professional exam. Business licenses, essentially, are permissions for an individual or company to practice or operate.

To obtain a permit, you must prove to an applicable agency that your business meets safety standards, something normally accomplished through inspections.

Make Sure You Know What Licenses and Permits You Need

Nearly every small business will need some type of permit or license to operate legally. A problem for many entrepreneurs, however, is figuring out exactly what kinds of business licenses and permits they need.

Not only do states have different rules for what’s required, but local governments also weigh in and a business that conducts activities regulated by a federal agency will need a federal license or permit, as well.

Let’s start by looking at some common types of business licenses and permits issued by local, state, and federal governments. Not every business needs the same kinds of licenses, but I want you to understand what’s available so you can research them to find out if they’re needed.

Licenses and Permits Issued at the Local Level

Many municipalities, including cities, townships, boroughs, towns, and counties, require that companies obtain certain permits before starting to conduct business.

Common business licenses and permits often required by local officials:

• Local Business Operating License – A commonly required license is a local business operating license, which basically grants permission to operate your business within the limits of your municipality.
• Health Licenses and Permits – Businesses such as restaurants, hair and nail salons, tattoo shops, yoga studios, and cafes normally need some sort of health permit to operate legally.
• Zoning Permits – It’s important to pay attention to local zoning regulations when you’re getting your business up and running. Certain areas are zoned for different uses. If you want to start a business in an area that’s not zoned for that use, you’ll need to apply for a zoning variance or conditional use permit to get permission to operate.
• Building Permits – Regulations vary, but if you want to construct a workplace, add on or renovate an existing space, or even install a new heating system or air conditioning, you’re likely to need building permits. Professional contractors should be able to guide you regarding what permits you’ll need.
• Fire Department Permit – Again, the rules are different depending on where your company is located, but you may need a fire department permit to operate, especially if your business is open to the public. Err on the side of caution and find out if you need one.
• Signage Licenses and Permits – Some municipalities weigh in on signs displayed at your business, regulating their size, what kind of lights they use, and where they’re located.

Licenses and Permits Issued at the State Level

Most businesses will be required to have some sort of state license or permit. Individuals such as physicians, dentists, and cosmetologists also are required to have business licenses.

Common state-level business licenses and permits:

• State Business Operating License – States issue business licenses largely for the purposes of keeping track of what businesses are operating within them and knowing how much revenue they’re generating for tax purposes.
• Seller’s License – If your business sells products such as liquor, gasoline, lottery tickets, or guns, you’ll probably need a seller’s license from your state. Regulations for seller’s licenses vary from state to state, so check what’s specific to where your business is located.
• Occupational License – As mentioned earlier, special licenses are required for businesses within certain occupations. These licenses must be obtained to get a business started and allow it to continue operating. Generally, licenses are required for accountants, real estate agents, insurance brokers, mechanics, contractors, electricians, plumbers, physicians, barbers, appraisers, private investigators, veterinarians, and others.
• Tax Permit – Any business that sells a product or service and operates in a state that has a sales tax must have a state tax permit.

Licenses and Permits Issued at the Federal Level

Certain business operations are regulated by federal agencies and must obtain a federal license or permit to operate legally. A plant nursery that grows shrubbery and transports it to other states, for example, is regulated by the U.S. Department of Agriculture and must have a license from that agency.

Businesses that operate within these sectors and are regulated by federal agencies:

• Agriculture, regulated by the U.S. Department of Agriculture
• Alcoholic beverages, regulated by the Alcohol and Tobacco Tax and Trade Bureau
• Aviation, regulated by the Federal Aviation Administration
• Firearms, ammunition, and explosives, regulated by the Bureau of Alcohol, Tobacco, Firearms, and Explosives
• Fish and wildlife, regulated by the U.S. Fish and Wildlife Service
• Commercial fisheries, regulated by the National Oceanic and Atmospheric Administration Fisheries Service
• Maritime transportation, regulated by the Federal Maritime Commission
• Mining and drilling, regulated by the Bureau of Safety and Environmental Enforcement
• Nuclear energy, regulated by the U.S. Nuclear Regulatory Commission
• Radio and TV broadcasting, regulated by the Federal Communications Commission
• Transportation and logistics, regulated by the U.S. Department of Transportation

How to Obtain Business Licenses and Permits

Once you’ve identified which licenses and permits you need, you’ll need to get applications from the licensing agencies in charge of your location. Complete the applications and submit them according to the instructions provided. This process normally can be completed online.

If you’re in a business or profession that requires you to pass a test or exam to prove you meet competency standards, you should review the eligibility requirements set by the licensing board or other organization in your area that oversees licensure. You’ll need to provide any necessary documentation regarding identification and education or training and pay any exam fees. Once you’ve chosen a test date, you can complete a registration form and prepare for the exam.

If an inspection is required to obtain a permit, you’ll need to schedule one with the appropriate agency. Some agencies allow you to schedule online, while others might require a phone call.

Knowing what permits and licenses you need and being proactive about getting them are key to making sure your business can open and operate in compliance with local, state, and federal authorities.

Remember: Licenses and Permits Are Your Responsibility

It’s up to you to figure out which licenses and permits you need, so you’ll need to take time to research at the local, state, and federal levels. Start by checking your state’s Secretary of State website, but don’t forget to check any local requirements that may apply, as well.

In addition to obtaining permits and licenses when starting your business, you’ll need to keep track of when you’re required to renew them, remembering to complete any necessary applications and pay the required fees.

If you’re not confident that you’ve obtained everything that’s required, consider consulting with a business attorney or business compliance company. The stakes of not having what you need are just too high.