One of the most confusing aspects of starting a business in Virginia and new business formation is the local business license requirement. This post addresses some frequently asked questions we receive from first-time entrepreneurs on this topic.
What is the local business license in Virginia (BPOL)
The Commonwealth of Virginia grant to local jurisdictions the authority to tax local businesses in two ways: A tax on tangible personal property owned by the business, and a tax on the business’s gross receipts (revenue). You must file a form to tell the local jurisdiction (county or city) that your business exists and therefore should be taxed. That form is often called a Business, Professional, Occupational License (BPOL), because that is how the State refers to it in statutes, but in fact, different local jurisdictions may refer to it by a different name. This “license” is separate from any professional license that may be required for your industry. For example, construction contractors must obtain specific licenses for the size of construction jobs they may perform, but all construction contractors must file a BPOL in order to be placed on the taxation roles for certain local jurisdictions.
Who must file the local business license application
Almost every business that operates within the Commonwealth of Virginia must file the BPOL with its local jurisdiction. There are a few exemptions from the gross receipts tax, found in the Virginia Administrative Code. Best consult an attorney for the details. Rest assured that most business activities must pay the gross receipts tax, and all must file the application so the local jurisdiction can get you on record saying what kind of business you operate.
How much is the local business license tax
The gross receipts (revenue) of the business are taxed at a rate that depends on the nature of the business–and the discretion of the local jurisdiction (within a range of values set by the State). Wholesalers pay a different rate than photographers, who pay a different rate than architects, and so on. And each of these companies will pay a different rate if their business is located in Richmond than a similar company located in Falls Church City (the site of the highest tax rates in the Commonwealth). The nature of the business is captured on the license application so the local jurisdiction knows how much to charge the company. To help identify the nature of the business, most if not all jurisdictions ask for your company’s NAICS code, which you can find in the NAICS directory. The complicated limits imposed by the State are in the Rates and Fees section of the Administrative Code. There is a threshold level of gross receipts below which you will not have to pay any tax…and that threshold also depends on the size and discretion of the local jurisdiction.
When must you file the local business license?
Each city or county has its own ordinance with its own language on this question. Most boil down to this definition of when you must file the BPOL: “As soon as you start (or start doing) business in the jurisdiction. And if you don’t file the application within xx number of days, we can impose a financial penalty on your business.” Sorry, that is just not as helpful as they seem to think it is.
We have client companies that have been created many months before they expect to make money. Other companies are doing business in a different State but they intend to expand into Virginia, so we file foreign entity status for them with the Commonwealth. All of these clients want to know if they can wait to file their business license application. We tell them that is okay, but eventually, it must be filed. What is the trigger event that means you absolutely must file the business license application?
But of course, you must be actively engaged in the business in order to determine the nature of the business and therefore what the rate will be. And even if you know the nature of your business, if it’s not making money the tax will be zero. But the trigger to file the business license is not when your business starts making money.
According to the Virginia administrative code the nature of “Business” means “a course of dealing that requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit.” Once one “advertises or otherwise holds himself out to the public as being engaged in a particular business,” that person is presumed to be engaged in business. Logically, you are not engaged in business yet before that happens. Note that you can be engaged in business before the company actually starts earning income. To the local jurisdictions, the important date is the one at which your company first engaged in business activities, not the date it started earning money.
When you first form your company, and you are not yet engaged in doing any work to look for customers. You may just be figuring out how to conduct business. And a business that files foreign entity status in Virginia may not yet be ready to tell everyone that they are open for business there. In either case, the legal requirement to file the business license application may not yet be met. So merely filing at the State level for formation or foreign entity documents cannot be the trigger event for filing the business license.
But as soon as your company starts to hold itself out for the possibility of earning money from its location in Virginia, then the company is engaged in business.
You have a grace period from that first date of doing business in order to file the license application. The grace period may be as short as 30 days or as long as 75 days, the time period depends on the local jurisdiction.
So you have a legal drop dead date for filing the business license application. It is the end of the grace period after you actually start holding out the company to accept customers or the date you first buy equipment, whichever is sooner. Penalties may be imposed if you fail to file the business license application before that time.
That is the legal answer. But is there any good business reason to wait that long? Does your company suffer by filing for a business license sooner than that? You might as well file the BPOL as soon as you register your business in Virginia, whether as a domestic or foreign entity, you know how to enter the “nature of business” question on the business license application. The only adverse effect of filing the BPOL sooner than the legal drop dead date is that you may have to spend a little time filling out a tax return with all zeros.
Where must you file the local business license?
Like every other part of the business license, this is complicated. For most businesses, you will file the BPOL at the place where (i) services are performed on a regular basis, or (ii) where the services are controlled or directed. If your business has an office in a Virginia jurisdiction and you direct the operations from that office, the situs of that office is the jurisdiction where you should file the BPOL. Helpful examples are given in the Situs section of the Administrative Code.
Entrepreneurs are going to save the world, and Argent Place® Law wants to help. Whether you are ready to start your own company now, you are expanding your business, or you’re getting ready to sell your business, Argent Place Law can help you succeed. Think how great it will be to have a lawyer with entrepreneurial experience on your speed dial whom you can call up and say, “I want to start a new company to deliver the best damn widget the world has ever seen! What do I do next?” Schedule an appointment, or just call Argent Place Law to find out: 703-539-2518.