You’re excited about launching a new business. Congrats! But you have no idea if you need a business license or to register an LLC. Maybe you need both? Even then, it’s not clear where you should start. This post uncovers everything you need to know about business license vs. LLC and how to navigate these crucial requirements.
The Top Rated Formation Services to Start Your LLC
Forming an LLC is an excellent option if you want personal liability protection and flexible tax filing. We’ve already narrowed down the best LLC formation services for your convenience:
- ZenBusiness – Best overall
- Incfile – Best for entrepreneurs on a tight budget
- Rocket Lawyer – Best legal consultation services for LLCs
- LegalZoom – Most popular LLC services
- LegalNature – Best for LLC documents and contracts
- MyCompanyWorks – Best same-day processing
- Swyft Filings – Best customer service
You can read our full reviews of each LLC formation service here.
What is a Business License?
A business license is a government-issued document that allows a business to operate within a specific jurisdiction. The business license may be issued at the local, state, or federal level. So, the appropriate business license depends on the industry you operate in.
Almost all businesses require one or more licenses to operate legally. For example, you’ll need at least a basic license to start a home-based business. Similarly, you’ll need a professional license to offer financial advice, hairstyling, or daycare services.
In short, a business license proves that you are legally allowed to conduct specific business or provide particular services within a certain jurisdiction. The government regulates people who can provide goods or services. So, your business license is like a contract with the government that allows you to run your business in compliance with local, state, or federal guidelines.
What is an LLC?
Unlike a business license, a limited liability company (LLC) isn’t a permit. Instead, it is a type of legally recognized business entity. Where a business license allows you to operate legally, the LLC designation describes the type of business structure you have.
Therefore, forming an LLC distinguishes your business from other business entities, such as a sole proprietorship or corporation. This distinction is essential for many reasons, including taxation and legal reasons.
Say, for example, your business is a sole proprietorship. This business structure doesn’t offer liability protection, so there’s no legal distinction between personal and business assets. As a result, your assets (like cars or homes) might be seized if your business is sued or goes bankrupt.
A discerning business owner may choose to convert their sole proprietorship to an LLC. The new business structure offers liability protection, meaning that business and personal assets are separated. This way, the business owner doesn’t lose their personal assets in case of litigation or bankruptcy.
Finally, you don’t need a business license to form an LLC. However, you will most likely need a business license for your LLC to do business.
The Basics of Business Licenses
Again, there are different types of business licenses. The one you need to operate depends on the nature of your business and industry. The most common business licenses include:
Federal Business License
Most small businesses don’t need a federal business license. This license mainly applies to companies that deal in products regulated by the federal government. Examples of regulated industries include:
You’ll need to obtain your license from the appropriate federal agency. For example, you can get your transportation license from the U.S. Department of Transportation. Similarly, the Federal Communications Commission issues licenses for the broadcasting industry.
Finally, you can apply for most of these licenses online. Simply visit the appropriate federal agency website to file the necessary paperwork. The website also provides detailed information for obtaining your license.
State Business License
Most states require a state-issued business license. This is especially true for companies that hire licensed professionals. For example, you may need a state business license if your company employs doctors, real estate agents, contractors, lawyers, or automotive mechanics.
You can visit your state’s Department of Commerce or Secretary of State website to determine if your field requires a state business license. In addition, you’ll typically need a taxpayer identification number (TIN), Social Security number (SSN), or Employer Identification Number (EIN), depending on your business entity.
You may also apply for the license online. Lastly, most state licenses require annual renewal. You’ll also need to pay a fee to obtain or renew your state business license.
Local Business Licenses
Most small businesses require a local business license. Again, this depends on the type of business you operate. You can find more information about the applicable licenses from your city or county office.
Some of the most common local business licenses include:
- Operating license
- Signage license
- Peddler’s license
- Vendor license
- Cleaning license
- Food license
- Tobacco license
- Health license
Again, you may require one or more of these licenses to operate an LLC. For example, you may want to run your janitorial or cleaning business under an LLC for tax benefits and liability protection. You’ll still be required to obtain the relevant licenses, such as a cleaning license.
The Basics of an LLC
Many small businesses start as sole proprietorships. It’s the most accessible type of business to start, and you don’t need to register with the state if you have all the relevant licenses and permits.
However, many small business owners prefer to form an LLC because of the business structures’ inherent advantages.
An LLC can have one or more members, including individuals, LLCs, and corporations. However, you’ll need to check with your state about membership requirements. Some states require LLCs to have two or more members.
Additionally, LLCs typically have an operating agreement. This document outlines how the LLC will be run. You can also hire managers to handle the company’s day-to-day operations.
An LLC is viewed as a separate entity from its owner. Therefore, LLC owners enjoy liability protection. That means the owner doesn’t have to pay debt, lawsuits, or other obligations with their personal assets.
A sole proprietorship doesn’t provide personal liability protection. The owner is liable for the business debts and obligations. For example, creditors may seize the owner’s personal assets to satisfy the obligation.
Limited Liability Companies can be taxed like a sole proprietorship or a corporation. This flexibility makes LLCs attractive for small business owners. LLCs also enjoy pass-through taxation.
This means that the LLC owner can pay personal income tax for the LLC. It also means that the LLC is only taxed once. You don’t have to pay taxes at the company level and again at the personal level.
4 Tools to Help You Get Your Business Licenses and LLC in Good Standing
As we’ve seen already, business licenses and LLCs are rarely mutually exclusive. There’s a good chance you need both to operate a successful business. Fortunately, you can use tools to either help you acquire a business license or form your LLC (or both).
LLC Formation Service
If nothing else, the LLC formation service will help you navigate the business licenses vs. LLC issue with little effort. These companies provide business owners with the information and professional assistance they need to create and operate a business. ZenBusiness is a terrific example of such a service.
For example, ZenBusiness can help you file all the necessary paperwork for creating and registering an LLC. Additionally, the filing service will research and file all the licenses you need to operate a compliant business. ZenBusiness prices start from $49 plus state fees and only take a few minutes to get started.
Small Business Administration (SBA)
A filing service like ZenBusiness can help you research the requirements for operating your business. However, you can do the research by visiting the Small Business Administration (SBA) website. It’s an exhaustive information hub for small business owners.
The SBA outlines state and industry-specific business license requirements. You can also apply for a license, register your business, and obtain federal and state tax ID numbers. Finally, the SBA website outlines the merits and requirements for various business structures, including LLC.
Secretary of State Office
Additionally, the secretary of state’s office provides all the information you need to obtain business licenses or file an LLC. It’s an excellent resource for finding state-specific requirements for your type of business. For example, you might find that your state requires an LLC to have at least two members.
Similarly, some states may require you to have a registered agent to obtain a business license. This is often the case if you don’t live in the state where you operate your business. So, be sure to visit your state’s secretary of state website for detailed information on licensing and LLC formation requirements.
Entity Name Check
You need a unique business name to obtain most licenses. You certainly need a business name to form an LLC. So you want to ensure that your business name is available, especially for a new business.
You can find an entity name check tool on your secretary of state’s website. The name search is also available with most agencies responsible for business filing. Alternatively, your LLC filing service should have an entity name check database.
4 Tricks for Business License and LLC Filings
Again, a business license is a document that allows you to operate a business legally. On the other hand, an LLC is a designation of the type of business entity for legal and taxation purposes. Below are a few tricks to help you with a business license and LLC filings.
Use a Business Filing Service
It’s worth reiterating the importance of business filing services. It’s the best way to ensure that your business complies with legal requirements. It’s also the easiest way to create and register a company.
The filing service is equally helpful when applying for business licenses or forming an LLC. For example, creating an LLC requires various paperwork, including a registered agent, an Article of Organization Form, and an Operating Agreement.
Similarly, you may need to register a business name and obtain a tax ID to apply for a business license. You’ll need to pay a fee in both cases. So, filing incorrectly means you forfeit the filing fee and repeat the process.
Business filing services only require basic information about your business. Then, the agent researches the relevant requirements and files paperwork on your behalf. It’s a worthwhile investment to ensure that your business is above board right off the bat.
Form an LLC Before Applying for Business Licenses
Again, you don’t need a business license to form an LLC. But, it’s a good idea to create your business entity before obtaining the licenses you need to operate the business.
Forming an LLC first means that you have to register a unique business name. Next, you can use your LLC name to file for the necessary licenses.
You can use your name to file for a business license in the case of a sole proprietorship. However, you may need to change the name on your license when you convert your business into an LLC. So it is better to register the LLC before obtaining the relevant licenses.
Explore Other Business Entities
An LLC is a perfect structure for small businesses. You get liability protection and flexible tax filing. However, it has its limitations. So it’s essential you know these limitations before filing your paperwork.
For instance, your LLC may be dissolved if you neglect to include a member withdrawal clause in your operating agreement. Additionally, investing in an LLC is often complicated, limiting your options if you require venture capital.
Ensure you explore other options, such as incorporating your business. S Corps are more attractive to investors for their stability and ease of transferring shares. An S Corp may also be better for a long-term business venture.
Fortunately, business filing services like ZenBusiness can help you decide the best entity for your operations. In addition, the company provides consulting services to ensure you register the best entity for your type of business.
Don’t Forget Business Permits
We’ve discussed business licenses at length. However, you may require a permit in addition to or instead of a business license. So don’t neglect to research the relevant permits for your business.
There is a subtle difference between a business license and a permit. Regardless, this distinction is essential. A business license is more general, allowing you to operate your business within a specific area.
Business permits are more specific. They are primarily concerned with ensuring public health and safety. You’ll also likely need to undergo some type of inspection before obtaining the permit.
Permits are essential for home-based businesses. Many of these businesses don’t require a license. However, most home-based businesses are subject to permits.
Examples of applicable permits include:
- Fire department permit
- Air and water pollution control permit
- Health department permit
- Building permit
- Alcohol, tobacco, and firearms (ATF) permit
- Building and zoning permit
Again, you can check with the small business administration to find out about the necessary permits for your type of business. Similarly, your state department should have the required information about the applicable permit. You can also consult with your LLC or business filing service to research the relevant permits on your behalf.
What to Do Next
We have a terrific post here outlining the steps you need to take to start a business. Check it out, so you’re familiar with what it takes before starting your exciting journey.
Next, consider contacting a business formation service like ZenBusiness to get the ball rolling. The service will guide you throughout the process, including researching the filing requirements and registering your business. We also have a detailed post here reviewing the Best LLC Services.