What Can Happen if You Operate a Business without a License
In order to operate a business, there are many requirements, such as registering with the state, paying taxes and obtaining a business license. In the case of business licenses, it can be a tricky process to manage because there is so much variability between industries and jurisdictions that there is not always a clear path forward.
Regardless, failing to obtain or renew a business license can be a costly mistake, resulting in significant penalties, such as fines, lawsuits and in extreme cases, even arrest. As the consequences of running a business without a license can be far reaching and have a long lasting impact on your company, it is crucial that you understand the risks of non-compliance.
Fines & Penalties
If you operate your business without a valid license, at a minimum, you should expect to have to pay a fine or penalty. This is the most common scenario might occur when a business fails to comply with business license requirements.
As with most things relating to business licenses, the exact amount of the fine or penalty will depend on several factors, including the severity of the offense and what jurisdiction you’re in. For example, missing a renewal deadline and being out compliance for a couple of months will often result in a lesser penalty than a business that willfully operates without a valid business license for years.
This is due to the fact that in many cases, jurisdictions will issue you a penalty based off of gross revenue that’s generated during the period of noncompliance. For example, if you didn’t have a business license for six months, the city or state would ask how much business was generated during that period of time and access a fine that is based on a percentage of your gross revenue.
In other cases, the fine or penalty for an expired business license might be a flat fee. Regardless of how the fine is calculated, it can be extremely costly to your business.
Not having the proper business licensure opens your company up to lawsuits. There are several ways that this can occur. A disgruntled customer that is unhappy with the goods or services you provided could take you to small claims court and cite your lack of business licensure as fraudulent activity. Alternatively, if you’re sued and you don’t have the correct licensure in place, the court could default to a judgment against your company, despite the other merits of the case. Either scenario could leave you on the hook for expensive damages and legal fees, in addition to any other fines or penalties.
Many people don’t realize that business closures are a potential outcome of failing to obtain or renew a business license. It seems extreme that a license that may have only cost $100, $200 or maybe $1,000 could actually cost you your business. But unfortunately, it is a very real consequence that a company might face.
We’ve seen this happen to real business owners. For example, one customer with multiple retail locations failed to renew a $75 license renewal for one particular store. The renewal notification went directly to the retail store, because the jurisdiction sends it to the location on record, not headquarters or the company’s legal department. As a result, it was ignored by the store manager. After 60 days, a second notice went out and when it was ignored again, the police department came and shut down the business.
A small oversight ended up costing this store not only in fees but lost revenue, as they had to remain closed while they sorted out their business license, hurting their bottom line.
In an even more extreme situation, you could even be arrested for not having a business license. Operating a business without a license can be considered to be fraudulent activity, so some jurisdictions might decide to arrest the parties responsible. Additionally, if you’re in a field like medicine or law, practicing without a license is illegal and can result in arrest.
For example, in the previous scenario where the police came to shut down the store, the store manager could have also been arrested as a “person of responsibility” to be used as additional leverage to ensure the company fulfills their license requirement.
While unlikely, this can result in a really disastrous scenario where a business loses money due to a business closure and is fined for not having a license, but then has to pay legal fees to defend or expunge the record of the person who was arrested on top of that.
Inability to Bid on Opportunities
Another consequence of operating without a business license could be the inability to bid on specific projects or opportunities. Sometimes, to win a bid, you have to show proof that you’re licensed. This is particularly common within the construction and contracting industries, where licenses are required to show that you meet and follow safety and insurance standards. If you don’t have the proper licensure, you can lose out on these opportunities, impacting the ability to grow your business.
Delays in Introducing New Products or Services
Delays in introducing new products or services are also something that can arise when you don’t have the proper licensure. For companies in the manufacturing industry, some jurisdictions require that you have a license to distribute specific type of products, such as toys or other consumer products. It’s something that can be easily overlooked, but if you don’t have the necessary business licenses, you’re not going to be able to release that product to market until you obtain them.
Loss of Reputation
One of the biggest consequences of not having a business license is also the most difficult to put a price on- the loss of your business’s reputation. If you do get fined or sued as a result of not having a business license and the word gets out, the resulting negative press can be more costly than any penalty, because your reputation is everything. When a customer hears that your business is not operating legally, it could call into question the quality of your work and the trustworthiness of your business, which can be devastating and difficult to rebuild. Sometimes, it could take years for the company’s image to recover after negative press.
How to Stay Compliant with Business Licensure
All of these potential consequences of not having a business license underscore the importance of staying compliant. You can avoid these pitfalls by doing thorough research when you open your business and obtain all of the necessary licenses for your industry- and by staying on top of renewals, so that none of them lapse.
To help, you can outsource your business license management with a company like CSC. Our services can streamline the entire license, permit, and tax registration process, as well as handle renewals to ensure that your business is always in compliance and that you never have to face any of these consequences. Contact our team of business license experts to get started today!
Want to learn more about business licenses? View our upcoming webinar, “Take Control of Your Business Licensing Process” here. See all of our upcoming webinars here.