Do Freelancers Need a Business License?
You’re ready to break out of the drudgery of the employee workweek and start your freelance gig. You have the skills, knowledge, passion, and drive.
The only thing missing is a business license.
Or is it?
It may surprise you to know that not all freelancers need a business license to do their jobs. It depends on the type of work you’re doing and where you’re located.
Even if you do need a license, don’t let that stop you from moving forward on your new career path. It’s probably easier than you think to get one.
What’s a Business License?
You’ve heard the term “business license,” but what exactly does this document give you the right to do?
In short, a business license is a legal acknowledgment that you can operate a business within a particular city. They are usually boundary-specific. If you have an establishment in multiple areas, you will probably need a license for each city’s jurisdiction.
Why Licenses and Permits Are Important
Yes, licensing and permitting are two ways the city makes money off its business-class citizens. However, the programs that are funded by the fees help ensure the safety of the general public.
Consider what would happen if there was no protocol to police businesses and any retailers could set up their shops without concern about who their neighbors were. It could be dangerous, to say the least.
With a business license framework in place, cities strive to cut down on hazardous situations occurring.
Any business that fails to follow the requirements governing their particular work type could face:
- Operational limitations
- Or get shut down entirely
Does Your Business Need a License?
The purpose of licensing is easier to understand once you look at it from a protection perspective.
However, if you’re not a gun retailer, do you need a license and policing?
The answer is maybe yes, maybe no. It depends on what industry your work falls under.
Here are a few business activities that need at least one license:
- Investment advising
- Drug manufacturing
- Preparation of meat products
- Ground transportation
- Selling alcohol, tobacco, or firearms
Various government agencies heavily regulate these industries. Your city will require a license, but you may also need one from the state and/or federal level.
If your activities aren’t listed here, that doesn’t get you out of the need for a license altogether. Any retailer who sells goods needs a sales tax license. This permits you to collect taxes from customers, which you then pay to the government.
Related: Do Artists Need a Business License?
Do Freelancers Need to Own a Business?
Where the government is concerned, there’s a difference between running a business and “owning” one.
As a freelancer, you can work for any client and charge whatever rates you want, as long as you pay taxes on your income.
Right now, if you haven’t officially set up your business with the IRS, they consider you a sole proprietor. Your federal taxes are based on your income that’s attached to your social security number.
This changes when you become a business owner, which is as simple as choosing a DBA (doing business as). Then, you can log into the IRS portal and set up a business structure.
Types of Business Structures and Their Benefits
Many freelancers opt to make their ownership role official for tax and liability purposes. The two most common structures for small businesses are sole proprietorship and limited liability companies (LLCs).
Both structures connect your finances to your business entity.
As a sole proprietor or an LLC owner you can:
- Request financial aid
- File for business tax deductions
- Enjoy the benefits of entrepreneurship
The primary distinction is in the area of personal liability. A sole proprietorship integrates your business and personal assets. If you’re sued for damages in one area of your life, the other area is responsible for those costs, too.
As an LLC owner, your business and personal bank accounts are separate. You can file bankruptcy in one and move on as usual in the other. This is a vital concern for people who often risk lawsuits because of their careers, such as lawyers and doctors.
Choosing Your Business’s Direction
Wherever you’re at in your freelance journey, remember that you don’t have to leap into the next step. You can go solo as an independent contractor or freelancer however organically you choose.
Some people join the gig work world as a side job, making a little extra cash piece-by-piece and client-by-client. Others provide a service, then use word-of-mouth referrals to build a solid client base before quitting their day jobs.
One concern that keeps many would-be freelance business owners tied to their employee paycheck is insurance. The good news is that platforms like Gigly help you find affordable healthcare coverage as an entrepreneur.
Gigly takes everything a beginner or growing self-employed worker needs to succeed and puts it all in one place. From finding insurance policies to setting up legal structures, it’s all there waiting for you to sign up.
Need some help with your tax return? Check out: Step-by-Step Guide to File Taxes When You’re Self-employed (Bonus: Six 1099 Deductions for Freelancers)
What If My Business is Online?
E-commerce is a seven trillion dollar industry and growing. With that many business owners operating online, you’re not the only person looking for ways to get your share of this lucrative pie.
The good news is that if you don’t fall under the categories listed previously, you don’t need a business license to sell online. You do need a retail license if you’re selling tangible goods. This ensures you’re collecting and paying taxes to the IRS.
Providing most services doesn’t need licensure. Yet, there are other regulations (that vary by state) you must follow that govern your industry. A freelance writer, for instance, doesn’t require a license or permit but operating a business offering legal services does.
To get your sales tax permit or retail license, you’ll need to apply online at your state’s government website. They’ll ask for your business name, proof of your legal structure, and your employer identification number (EIN) or social.
You may also like: The Self-Employed Guide to Meals and Entertainment Deductions
How Can I Get a Business License?
Going through this list, you’ve figured out that your type of freelance work requires a license. The next step is to find out if you need a city, state, or federal license (or all three).
The best way is to start at the top and work your way down. Generally, an industry regulated at the federal level will also require a state and a city license. You’ll need the federal before getting the state approval and the state for a city.
So, we’ll follow that format and begin discussing licensing requirements at the federal level.
Getting Federally Licensed
As long as you’re paying your sales and income taxes, the government doesn’t feel the need to oversee every small business owner. Industries that draw the government’s attention are those whose impact on the general public could be dangerous or widespread.
What businesses fall into those categories?
All of these:
- Alcoholic beverages
- Firearms, ammunition, and explosives
- Fish and wildlife (including commercial fisheries and maritime transportation)
- Mining and drilling
- Nuclear energy
- Radio and television broadcasting
- Transportation and logistics
Should your business include any of these factors, use this site to find the right issuing agency to start applying for your license.
Getting to skip the federal licensing step is cause for a big sigh of relief. You honestly avoided what could have been a time-consuming and expensive part of the business right there.
Still, you may have to file at the state level. Licenses and permits for states, counties, and cities vary at each tier. They, and their associated fees, also depend on the type of business you’re engaging in and the location.
While the federal agencies only pay attention to big-league industries, local governments regulate almost every business activity.
There’s a pretty good chance that if you’re providing an in-person service, you’re going to need at least a retail, business, or sales tax license.
Don’t let this scare you, though. The Small Business Administration makes it easy for new entrepreneurs to set up their business with a free SBA mentor. Their website’s “Local Assistance” section connects you to someone with SBA training who can answer your questions and serve as a guide.
Is There Anything Else I Need to Freelance?
Before you start providing services or selling goods part-time or full-time, make sure you don’t need insurance. Some insurances are mandatory, while others are smart business sense.
An easy example is auto insurance. If you’re driving your car for work-related purposes, you’ll need a commercial auto policy. Your personal insurance carrier may be able to add a rider to your existing policy, but not all insurers offer commercial coverage.
Other Types of Insurance to Consider
These four insurance coverages are essential to some businesses, but even if they’re not for yours, they’d be a wise investment.
General liability insurance is also called business liability coverage. It kicks in to protect you from claims against bodily injury, personal injury, and property damage.
It also covers you if you get accused of copyright infringement. As an example, this could happen if your graphic designer neglected to ensure the logo they created for you was 100% original.
If you’re ever sued because of an accident, it could be catastrophic to your business. A small liability policy that matches your risk level protects you from this concern.
This is often referred to as E&O (errors and omissions) coverage in the business world. Professional liability is the policy that protects your assets if you are ever accused of negligence.
This is a must-have for anyone who deals with another person’s valuables or health or gives financial or legal advice to clients. In some industries, a client will request this coverage before they’ll sign a contract with any business.
If your business activities involve accessing a customer’s sensitive data — you need cybersecurity insurance. A data breach can cost you millions of dollars, and even the best security systems get hacked occasionally.
Business owners are required by HIPAA, the Gramm-Leach-Bliley Act, and the Homeland Security Act to do their due diligence to protect customer information. Follow these guidelines, and invest in a cybersecurity policy, too.
Who pays your bills when you get sick?
As a freelancer turned business owner, you no longer have sick days. It’s up to you to eat well, exercise, and take care of your health.
This also includes investing in a healthcare policy. Studies show that people with insurance are more likely to go to the doctor early, preventing serious health conditions.
Insurance can be expensive when you’re not covered under a corporate umbrella — unless you use Gigly. Gigly teams up with the Alliance of Gig Workers to get its members access to a vast network of providers at indemnity rates.
Take control of your health at home with diet and exercise and insurance that protects your wallet. These actions will give you the peace of mind you need to focus on your business.
See also: What is Critical Illness Insurance?
Does your freelancing future depend on whether you have a business license or not?
If so, it’s a bump in the road, not a detour.
Use the resources in this article, like Gigly, to knock that obstacle out of the way. Gigly will keep you on the move to your final destination — as a successful member of the thriving gig economy.