Becoming a licensed business is an important step that every startup must take when it comes time to sell a product or service. Here are a few ways that obtaining a license will impact your business.
- Business Tax. As soon as your business becomes licensed, you will be required to pay business tax on income. Depending on entity type, your business owners may be able to cover business tax on their personal income tax forms. Otherwise, a separate form should be filled out and returned to that your business remains compliant with the IRS.
- Local Taxes. Licensed businesses will be required to pay a local tax for the right to sell their product or service in their local municipality. A typical schedule requires payments to be made at the end of each quarter and year. Failure to make local tax payments could result in a fine, suspension or even loss of license.
- Tax Savings. For small business owners, some local governments offer tax savings depending on your revenues. For example, a business that earns $10,000 a year in revenues might pay a lower percentage tax than a business that makes $100,000 a year.
- Federal Employer Identification Number or EIN. EINs serve as a sort of tracking number for the IRS. This identification number is commonly used for license as well as sales tax, payroll tax, and other business registration purposes. Corporations, partnerships, and similarly taxed Limited Liability Companies (LLC) are required to obtain an EIN. A sole proprietorship and similarly taxed LLC is not required to obtain an EIN unless the business pays wages or is required to file pension or excise tax returns; however, EIN are useful for sole proprietorships or similarly taxed LLCs in order to establish a history of business transactions for commercial purposes and to build a separate business credit rating.
Published: March 7, 2014