Licensing Fee: Definition, How It Works, vs. Royalty, and Examples

What Is a Licensing Fee? 

A licensing fee is money paid to buy specific rights from another party. For example, this fee may be paid to a government agency by people or companies for the privilege of offering professional services or engaging in a specific type of business.

In other cases, licensing fees are paid for the right to use intellectual property, such as patents, trademarks, or copyrights, owned by another person or entity.

How Professional Licensing Fees Work

Many professions require licenses before a person can perform the work in that field. These licenses are usually granted after the individual has passed a certification exam and completed a required amount of training.

For example, licenses are required to become a professional in many fields, including:

• Engineer
• Landscape architect
• Certified public accountant (CPA)
• Surveyor

Once licensed, an individual is known as a licensee. To maintain their licenses, they may need to take additional exams, complete further training, or pay ongoing fees. Their license can be revoked if the licensee violates legal standards or the code of ethics in their profession.

State governments often issue these licenses, and individuals looking to do business in multiple states may have to obtain a license from each one. For example, life insurance agents usually hold a license in their home state, or the one where their business is based, but they can also obtain nonresident licenses to do business in other states through reciprocity agreements.

Beyond state-level licensing, the federal government also requires certain businesses to pay licensing fees. For example, the Nuclear Regulatory Commission charges licensing fees to commercial nuclear power plant operators. The Federal Communications Commission (FCC) imposes fees on radio and television broadcasters, among other industries that are regulated at the federal level.

Pros and Cons of Professional Licensing Fees

Professional licensing aims to guarantee that people or businesses engaged in a certain trade or selling specific products are qualified and knowledgable. It also provides the public with the confidence in these professionals. Finally, licensing fees also serve as a revenue source for government agencies.

For example, a CPA is an important position as that individual can audit state and local governments and, in some cases, protect the public from financial crimes. A notable example: CPAs at the Federal Bureau of Investigation (FBI) who unraveled complex, illegal financial transactions, such as mobster Al Capone's conviction for tax evasion.

The licensing fee for CPAs is vital as it ensures that these professionals adhere to rigorous standards of expertise and ethics, essential for handling sensitive financial information and protecting public interests in various high-stakes scenarios.

However, the costs associated with licensing fees, along with the time and investment required for the necessary training, can create barriers to entry into licensed occupations. For example, hairdressers must pay a licensing fee and obtain a cosmetology license to legally operate, which in turn can increase the cost of their services.

These requirements for professional licensing are meant to ensure quality and provide the public with confidence in those professions. Some may argue that weakening licensing requirements or reducing fees could put the public at risk. But licensing fees may also inadvertently limit the number of professionals entering certain fields and lead to a shortage in certain services.

How Other Licensing Fees Work

A licensing fee can also refer to a sum paid to use intellectual property of various kinds, such as a copyrighted work, like a photograph or a logo, that is owned by someone else.

For example, a T-shirt company that wants to sell shirts imprinted with a certain Major League Baseball team’s logo would need to pay a licensing fee to get Major League Baseball’s permission and possibly the permission of the team itself.

A television or movie company wanting to use a particular song in its soundtrack might have to pay for multiple licenses. According to the American Society of Composers, Authors and Publishers (ASCAP), which licenses more than 18 million songs and scores, the producer would need to obtain a synchronization license for “the right to synchronize a song or a piece of music with your visual image. It must be obtained from the copyright owner of the music, which is usually the publisher.”

In addition, the company would need to obtain a master use license for the “right to reproduce a specific recording of a song” from the relevant music label.

In one notably expensive example, the producers of “Mad Men” reportedly paid about $250,000 to license the Beatles song “Tomorrow Never Knows,” so that the character Don Draper could listen to it in one scene.

Licensing Fee vs. Royalty

Royalties are ongoing, usage-based payments for the right to use an asset or a property. They are generally calculated as a percentage of gross revenue or net profit. Licensing fees, by contrast, are usually a fixed amount. 

Some businesses pay both licensing fees and royalties. For example, a franchisee might pay the parent franchiser an initial license fee for the right to use the franchise’s name and processes plus regular royalties based on sales. Those royalties often average 5% to 9% annually, depending on the franchise.

The Bottom Line

People or businesses often pay these fees to government agencies to practice a profession or conduct a particular business. Licensing fees ensure that professionals meet necessary standards, thereby protecting public safety. For intellectual property, licensing fees are paid to use copyrighted, trademarked, or patented material.

Licensing fees can help maintain safety and professional standards, but they can also create barriers to entry in certain professions. This can result in fewer available services and increased costs for customers. When it comes to intellectual property, licensing fees enable the legal use of creative works and protect the work of artists, though they also increase costs for businesses seeking to use these works.