Is an LLC a Business License?

If you’re starting a new business, you’ve probably encountered the term “LLC” and wondered what it is. LLC stands for limited liability company. It is a common business structure that combines aspects of a corporation with aspects of a partnership or sole proprietorship. But is forming an LLC the same thing as getting a business license? Let’s take a closer look is an llc a business license?

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What is an LLC?

An LLC is a legal business structure that is registered with the state. Forming an LLC creates a legal entity that is separate from its owners. This means the LLC can enter into contracts, take on debt, pay taxes, be sued, and conduct business generally. The LLC shields the personal assets of the owners from the potential liabilities and debts of the business.

Some key characteristics of an LLC:

Easy to set up with minimal requirements
Owners have limited personal liability protection
Profits pass through to owners and are taxed only once
Owners have flexibility in structuring management and operations
Less administrative paperwork than a corporation
Overall more flexibility than a corporation

LLCs are hybrid entities that blend aspects of partnerships, sole proprietorships and corporations. From partnerships and sole proprietorships, LLCs get pass-through taxation and the flexibility of informally managing the company. From corporations, LLCs get liability protection for owners and the credibility of a legal business entity.

Compared to an S corporation, an LLC offers more flexibility in ownership and management structure, allows a greater variety of member types, and has fewer administration requirements. However, S corps may have some advantages when it comes to taxes and raising investment capital.

What is a Business License?

A business license, also called an occupational license, is an official certificate issued by a governmental agency that permits to operate a business. Licenses are typically issued at the city, county or state level. They authorize companies and individuals to conduct business activities within that jurisdiction.

Some common reasons local governments require business licenses:

Generate revenue through license fees and taxes
Ensure public safety and consumer protection
Zone businesses appropriately within the region
Regulate industries that utilize public resources or have environmental impacts
Limit and monitor certain business activities in the area

Licenses are mandatory for most businesses. The requirements and costs vary based on location and industry. Some examples of common licenses:

General business license – required for any type of business
Professional license – for specialized services like law, medicine, cosmetology, accounting, etc.
Food service permit – for restaurants and food-related businesses
Retailer’s license – for stores selling goods
Contractor’s license – for construction companies and tradespeople
Alcohol license – for businesses serving liquor

Unlike forming an LLC, obtaining a license is an ongoing requirement. Licenses must be renewed periodically per the jurisdiction’s rules. Fees are usually paid annually.

Key Differences Between an LLC and a Business License

Although LLCs and business licenses are both tied to formally starting a business, they serve different legal purposes:

Formation vs. permission – An LLC is a legal business structure you form, while a license permits you to operate within a certain jurisdiction.
Entity creation vs. qualification – Forming an LLC establishes a recognized business entity, while licensing qualifies you to conduct a certain business in compliance with regulations.
One-time vs. recurring – LLC formation is a one-time process to create the entity, while licensing requires periodic renewal and fees.
State vs. local – LLCs are registered at the state level, while licenses are issued by local governments.
Limited liability vs. compliance – The main purpose of an LLC is liability protection, while licensing focuses on compliance and consumer protection.
Flexible vs. mandatory – LLCs offer flexible management and tax options, but licenses are mandatory for most businesses within their jurisdiction.
Separate entity vs. individual approval – The LLC exists independently from its owners, while licenses are tied to individual applicants.

In a nutshell, an LLC establishes a legal business structure, while a license grants individual approval to operate a business within a certain area. An LLC does not function as a business license. Let’s look at why you need both.

Why You Need an LLC and a Business License

Starting an LLC does not grant you a business license. And having a local business license does not create a formal business entity. That’s why most businesses need both:

Benefits of forming an LLC:

Liability protection for personal assets
Credibility of a legal business structure
Pass-through taxation
Operational flexibility

Benefits of getting a license:

Legal permission to operate in the jurisdiction
Compliance with local regulations
Consumer and environmental protections
Authorization for business activities like selling goods, serving liquor, etc.

Together they provide:

Limited liability for the entity and its owners
Ongoing approval to conduct business in a region
Legal compliance at state and local levels
Tax advantages combined with operational flexibility

Some key reasons you need both:

State vs. local requirements – The LLC is registered at the state level but licenses are issued locally.
Liability vs. permissions – The LLC shields your personal assets but doesn’t give you authority to operate in an area.
Formation vs. renewal – You form an LLC once but must renew licenses periodically.
Entity credibility vs. compliance – The LLC gives you an official business structure while licensing ensures you follow regulations.
Flexibility vs. mandatory activities – The LLC allows you to pick customized management and tax options while licenses authorize regulated business activities.

As you can see, LLC formation and business licensing serve related but distinct legal purposes for a new business. Satisfying both state and local requirements allows you to operate while minimizing personal liability and maximizing credibility. Think of it this way – the LLC birth certificate documents the entity while the licenses grant permissions to do business in each location.

Steps for Forming an LLC

The process for establishing an LLC varies by state but generally includes the following steps:

Choose an available business name – Make sure your LLC name isn’t already taken by searching your state’s business name database.
File formation documents – This includes the articles of organization or certificate of formation. It establishes the LLC as a legal entity.
Designate a registered agent – All states require an agent authorized to accept legal documents on behalf of the LLC. It can be a member or third party service.
Create an operating agreement – This document outlines the LLC’s ownership, structure, member responsibilities, profit distribution, etc. Not mandatory but recommended.
Obtain an EIN – An employer identification number identifies the business for tax and reporting purposes. It’s like the LLC’s social security number.
Comply with licensing – Research which licenses the business needs based on location and activities. Requirements vary.
Create a banking resolution – This establishes a bank account in the LLC’s name so you can keep business income and expenses separate.
Draw up member agreements – If there are multiple members, agree on each person’s ownership percentage, voting rights, responsibilities, etc.

The state filing fee to form an LLC typically ranges from $50-$500 depending on the state. Many entrepreneurs choose to hire a company or attorney to complete the process rather than DIY.

How to Apply for a Business License

Here are the typical steps small business owners follow to get licensed locally:

Check requirements – Contact your county and city clerk’s office to ask about licensing requirements for your type of business. Requirements can vary wildly.
Obtain application forms – Application forms will list the documentation and information you need to provide about your new business. This also clarifies license fees.
Complete the application – Fill out the forms fully and accurately. You will need to provide basic information about your LLC, owners, location, planned activities, etc.
Submit support documentation – Some common documents or proof needed include lease agreements, ID, tax forms, insurance policies, background checks, floor plans, etc.
Pay license fees – Fees are normally paid upon submitting the application. Costs range from $10 for a basic license up to thousands for liquor licenses.
Pass inspections – If opening a restaurant, retail store, or facility, health and building inspectors will do an onsite inspection before approving a license.
Obtain the license – If approved, you will receive the official paper license document or certificate, usually within 1-2 months of applying. Display this publicly at your business location.

It’s advisable to apply for a license several months before aiming to open doors to the public. Also, many occupations require practitioners to hold professional or occupational licenses separately from the general business license.

Maintaining Compliance After Licensing

Receiving a business license is not the end of compliance responsibilities. There are ongoing requirements to maintain a license over time legally:

Renewal – Licenses expire annually, biannually, or triennially, depending on the jurisdiction. You must renew before the expiration date, which often involves paying a renewal fee.
Changes – Inform the licensing office if you change your business location, structure, ownership, activities, etc. Some changes require a new, updated license.
Taxes – Stay current on ongoing income taxes and ongoing local taxes for “doing business” in the jurisdiction.
Compliance – Over time, follow the regulations tied to the license. This includes health codes, liquor regulations, zoning restrictions, etc.
Inspections – Certain high-risk industries, like restaurants, get periodic inspections to ensure continued code compliance. Passing inspections is required to renew the license.
Insurance – Some licenses mandate keeping current liability insurance policies. You may have to provide renewed proof of coverage periodically.
Posting – In some areas, the physical license must be visibly displayed on the premises where the public can see it.

Staying current on renewal deadlines, paperwork, fees, posting requirements, and changing regulations is essential to maintaining licensing compliance. Non-compliance can result in citations with monetary penalties or even license revocation.

Frequently Asked Questions

Q: What are the most common types of business licenses?

A: The most common licenses are general business licenses required in a particular county or city for any business. Other frequent licenses include professional licenses for specialized services, food service permits, retailer licenses to sell goods, liquor licenses, and contractor licenses for construction tradespeople.

Q: Does my LLC need a new business license in every county where we operate?

A: If your LLC has a nexus (a presence) in multiple counties, you likely need to obtain business licenses in each county where you do business. Requirements vary slightly by state and county. Some counties require licensing for even minimal activities. Check with each county clerk.

Q: How long does it take to get a business license?

A: The timeline ranges from a few weeks to a couple of months, depending on the jurisdiction. More complex applications with inspections required tend to take the longest. You can expedite the process by ensuring applications are completely accurately and submitting all documentation required upfront.

Q: Can I form an LLC, or do I need a lawyer?

A: If you meet all state requirements, DIY options exist for forming an LLC without a lawyer. However, getting help from an attorney or company specializing in registrations can save you time and ensure everything is done correctly. They also help with drafting an operating agreement.

Q: Does a multi-member LLC need an operating agreement?

A: Creating an operating agreement is optional but highly recommended for multi-member LLCs. This important document outlines ownership stakes, voting rights, member responsibilities, profit distribution, buyout terms, and other structural and operational issues. It helps prevent disputes.

Final Summary

Forming a limited liability company and obtaining a local business license serve overlapping but distinct legal purposes for new businesses.

An LLC establishes a formal business structure with built-in liability protections for owners. However, it does not automatically grant commercial permission to operate in a region.

All businesses need insurance, here’s why. Meanwhile, business licenses provide official approval to conduct business activities within a certain jurisdiction legally. However, it’s important to note that business licenses alone don’t create a recognized business entity. That’s why most entrepreneurs must complete both steps – forming an LLC for liability purposes and getting properly licensed for compliance, while also securing insurance to safeguard against unforeseen risks and ensure comprehensive protection for their operations.

These two documents allow you to maximize liability protection and operational flexibility while ensuring your new venture follows regulations. Consult with legal and accounting professionals to ensure you meet every formation, registration, licensing, and compliance requirement at state, county, and municipal levels.

With the right business structure and licenses in place, you can confidently launch and grow your business in a legal, credible manner. Best of luck!

Tags: business entities, business license, business registration, entrepreneurship, legal compliance, legal requirements, legal structure, small business, starting a business