Do independent contractors need business licenses?

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Question:

I'm a freelance software developer. Except for parking myself in coffee shops once in a while, I mostly work from my home. Do I need a business license to do this?

Answer:

The answer depends on where you work and what you do. A few states -- including Alaska and Washington -- require all businesses to get a state business license. Most states aren't this fussy, but they do require people in certain occupations -- such as doctors, lawyers, nurses, and architects -- to get a state license. We're not aware of any state that requires software developers to get a special state business license.

Many cities, counties, and municipalities require local business licenses, even for one-person, home-based operations. Usually, you can get this type of license simply by paying a fee. Some cities don't impose any license requirements at all, or exempt very small businesses.

To figure out what to do, call your local official in charge of business licensing. This might be the city or county clerk, planning or zoning department, city tax office, building and safety department, or department of public works. Your local chamber of commerce might be able to tell you who to call.

One word of warning: Before you apply for a local business license, make sure that your zoning laws allow home businesses. If your city or county prohibits home businesses in your neighborhood and takes this ban seriously, you could get into trouble when you apply for a local business license. You'll have to provide your business address to get the license, and your city and county might check first to make sure that your neighborhood is zoned for home businesses.

Many self-employed people, particularly those who work at home, never bother to get a local business license. If your local government discovers that you're running an unlicensed business, it may fine you and bar you from doing business until you get a license. However, the chances of discovery are probably quite small (especially if you're not doing anything to annoy your neighbors -- and thereby increase the chances that they might report you to the local authorities).

To learn more about these kinds of laws, see Nolo's book, Working as an Independent Contractor by Stephen Fishman, J.D.

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