FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Trade License

Updated on March 27, 2024
Article byShrestha Ghosal
Edited byShrestha Ghosal
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Trade License?

A trade license is a license a company must obtain from the authorities before commencing a business. It permits the company to carry out certain activities legally. This legal document gives legitimacy to a company and allows it to perform the actions it was granted for.

Trade License

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Trade License (wallstreetmojo.com)

A company trade license is required when a company creates its business checking account or hires employees. Furthermore, this document is necessary when a company applies for credit or capital for its business. Therefore, a company should acquire its trade license at least a few months before starting its business activities.

Key Takeaways

  • A trading license is a legal document a company must acquire to carry out certain business activities. This document is proof that the business is not involved in any illegal or unethical activity. Additionally, it shows that the company is adhering to all the rules and safety guidelines issued by the government.
  • A company must obtain this license a few months before commencing business activities. This document helps a business get investors, creditors, and customers as it validates the company’s credibility.
  • If a business operates without a trade license, it is considered unlawful and heavy fines may be levied on the company.

Trade License Explained

A trade license is a legal document a company must acquire before starting business activities. This document provides legitimacy to a company and grants it to perform various activities for which the license has been issued. It is proof that the company’s business activities will not be a hazard to anyone. It also shows that the company will not act in any way that would inconvenience anyone.

The business must acquire the company trade license before it commences its operational activities. Ideally, it should be obtained three months before starting a business. The license department issues this document, which is an authorized establishment that permits a company to carry out several activities. The company must pay a specific fee for acquiring this document. The amount varies in different countries. In addition, some city authorities may require the business to pay its fees. The fee amount is pre-determined, or it can be a percentage of the company’s annual sales.

This license requires a business to operate during business-like work hours and provide certain perks to its employees. This document also allows an individual not to be personally liable for their business debts. The license separates an individual’s taxes from their business taxes, and they must submit a separate file for the two. It allows the company several tax benefit that a personal tax does not receive. Furthermore, this license allows a business to join several professional groups.

A company must obtain this license before starting its business activities. Without the license, the business will be considered illegal. As a result, it may be subjected to heavy penalties. This license is also beneficial before a company begins its marketing activities. The license will be proof of the business’s lawfulness. Thus, customers, creditors, and investors are likelier to believe in the entity’s authenticity.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Types

The businesses mainly use one of the two following types of trade license:

#1 – Import Export And Sales Company License

This license makes a company eligible for billing any customer in the US. The customer can be an individual or any company. It will allow the company to act as an intermediary between customers and suppliers. Additionally, it will enable a company to sell its products directly in the American market.

#2 – Consulting Or Services Company License

This license allows a company to carry out both consulting and service activities. It permits businesses to charge individuals or companies for consulting and other services. A company that sells any intangible product must acquire this type of license. This license requires the clients to pay a determined amount to the business for availing of their services.

Registration And Renewal Requirements

The trade license renewal and registration requirements are as follows:

  • A company must search for the license requirements set by the country in which it is operating. Many states provide small businesses with resources like free consultation services or checklists for starting a business.
  • A company should check if its business name is available in the state’s business name database. It must also choose a unique name for itself.
  • The company must choose the business’s operating structure. These business structures include a sole proprietorship, a limited liability partnership, a limited liability company, and a non-profit company.
  • The company must apply for the Employer Identification Number (EIN) with the Internal Revenue Service (IRS).
  • The company must complete the trade license application online, via mail and fax, or in person. 
  • The company must review the additional business licenses or permits it must acquire before starting its operations.
  • The company should renew the license before the stipulated period. The license validity differs in different countries. The business must check when the license loses its validity and apply for trade license renewal accordingly.

Examples

Let us understand this concept with the following examples:

Example #1

Suppose Mrs. Rose wants to start a company for manufacturing wellness products. Four months before starting her business activities, she applied for a license that would legalize her business. Mrs. Rose chose the name “Divine Soul” for her company. She applied for the license online, provided the necessary documents, and paid the fees. She was issued the license by the concerned authorities soon after. This license helped her get investors and creditors for her business. This is a trade license example.

Example #2

The United States administration granted a license to Trinidad and Tobago to develop a gas field. The gas field would be located in the Venezuelan territory waters. The Prime Minister of Trinidad applied for the license in mid-2022 and obtained it after winning a discussion with the top US officials. Trinidad expects to access about 350 million cubic feet of gas daily from the Dragon gas field. This is another trade license example.

Trade License vs Shop And Establishment License

The differences between Trade License and Shop Establishment License are as follows:

  • Trade License: The License Department of the Municipal Corporation issues this license. A business can carry out specific trading activities under this license’s permit. It is granted to an individual to carry out a particular trade. It is obtained just for commercial premises. It is proof that the business is not engaging in unethical or unlawful activities. It is also proof that the company is following the rules and safety guidelines the government has issued.
  • Shop And Establishment License: This license is mandatory for all business establishments, including an office set up at home. After registering itself, a company or a commercial shop is issued this license. It falls under the Shops and Establishment Act, and all business entities registered with the government must obtain this license. They are acquired for stores or establishments even inside residential premises. Therefore, small traders and shop owners must obtain this license.

Frequently Asked Questions (FAQs)

1. How much does a trade license cost?

A trade license fee starts from $15 to $20 and can go up to $300 or even more. In addition, there is a fee that a company must pay initially to register itself and an annual fee for renewal. The business must also pay the sales tax it owes to the government. The sales tax varies in different countries and states. It also varies according to the county or the city where the business is located and operates from. It is required for specific business types and structures.

2. Is a trade license mandatory for an online business?

Yes, a trade license is mandatory for an online business. This license is compulsory for all businesses, permitting them to conduct certain trading activities. It provides the government with a way to keep track of all the companies operating in a particular area. Furthermore, it allows the government to keep track of tax revenue.

3. Can the trade license be transferred?

Yes, a trade license can be transferred in specific circumstances. It depends on the nature of the transfer and the jurisdiction concerned with issuing the license. The process also varies according to the circumstances. A new application may be required depending on the nature and concerned authorities.

This article has been a guide to what is Trade License. We explain its registration & renewal requirements, types, examples, and vs shop & establishment license. You may also find some useful articles here –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *