Starting a business is an exciting journey, but it comes with many legal requirements that can be confusing.
One key concept is the difference between an LLC (Limited Liability Company) and a business license.
An LLC offers a robust legal structure that protects your assets, and a business license grants you legal permission to operate within your industry and location. It’s important to note that not all businesses require a business license to operate, but certain industries and locations do. For instance, restaurants, construction companies, and healthcare providers often need specific licenses to comply with regulations.
This guide will help you understand:
- The differences between an LLC and business licenses
- Why and when your business may need specific licensing to operate legally
- An easy-to-follow process for finding out the business licenses you need and how to get them
- Some of the most common misconceptions we’ve seen about LLCs and business licenses
What is an LLC?
An LLC is one way to establish a business legally. In the United States, an LLC is a business entity that gives small business owners personal liability protection more simply and affordably than a C Corporation.
The essential parts of an LLC are:
- Members: These are the people or entities that own the business. Members can be individuals, corporations, other LLCs, foreign entities, or trusts. They can be involved in running the business (active) or just invest money (passive).
- LLC Operating Agreement. This document explains how the LLC is run. It details who owns what, how the business is managed, and how profits and losses are shared among members.
- Registered Agent. This person or service receives legal papers for the LLC, like if someone sues the business. Your chosen registered agent or hired registered agent service must have a physical address in the state where the LLC is registered.
- Management Structure:There are two types:
- Member-Managed LLC: All members make decisions and run the business. This is common in small LLCs with active owners.
- Manager-Managed LLC:One or more managers run the business; these managers can be members or hired from outside. This is common in larger LLCs or when owners want to avoid managing daily operations.
- Articles of Organization: This is a legal document filed with the Secretary of State where the business operates. It includes basic information about the LLC, like the business name, address, registered agent, and details about its members. It’s also known as a Certificate of Formation.
Owning an LLC means additional responsibilities to keep it in good standing. This could include:
- Getting an Employer Identification Number (EIN)
- Filing annual reports if needed
- Managing a business bank account and credit card
- Complying with the IRS (Internal Revenue Service) by paying income tax, state tax, and sales tax
Understanding Business Licenses
A business license is a government-issued permit that allows a company to operate legally in a specific location or industry.
They're essential because they ensure your business complies with local, state, and federal laws.
The licenses you need to operate your specific LLC will vary depending on:
- Where your business operates
- The type of business you own
For example, if you own a restaurant, you may need both food service and liquor licenses. You may also need food handling and music permits.
If you own a construction company, you might need various building permits.
These permits and licenses protect public safety and welfare by ensuring businesses adhere to rules and regulations.
Is an LLC a Business License?
An LLC is not a business license.
An LLC is a legal way to structure your business. It protects your assets from business debts and lawsuits. However, forming an LLC doesn’t mean you can start doing business immediately.
A business license permits you to operate your business legally in a specific area or industry. Depending on your business, you must get local, state, or federal government licenses.
So, while an LLC legally establishes your business, you still need business licenses to operate it.
Federal, State, and Local Business Licenses
You may need to apply for business licenses at different levels of government. This will depend on the nature of your business activities:
Federal Licenses.These are needed for businesses engaged in activities regulated by federal agencies. Examples include businesses involved in:
- Selling alcohol, tobacco, or firearms
- Broadcasting or transportation
State Licenses. These are often required for professional services such as:
- Healthcare
- Legal advice
- Real estate
Specific trades, like auto repair or building construction, might also need state-specific licenses.
Local Licenses.These typically involve zoning permits, health department approvals, and other locality-specific requirements.
For instance, a cafe may need a local health permit to operate. A retail store might require a zoning permit to ensure it’s in a commercially zoned area.
Business License vs. LLC
An LLC is a legal entity that separates a business owner from the business. It helps keep your assets safe if your business gets into legal trouble. But an LLC alone doesn't give you the right to operate your business. For that, you need business licenses.
A business license permits you to run your business legally in a specific area. You may need different permits depending on your business's activities and location.
Many businesses will need both:
- An LLC for business structure, legal recognition, and tax purposes
- Business licenses for operational compliance
An LLC without the appropriate licenses can face legal issues, fines, or shutdowns despite its protections.
Why and When Does Your LLC Need a Business License?
Your LLC needs a business license to operate legally within a specific area. The licenses you need depend on the type of business, its location, and specific industry regulations.
Here are some key reasons and scenarios when your LLC would need a business license:
Why Your LLC Needs a Business License:
- Legal Compliance. A license ensures you follow local, state, and federal regulations. This helps prevent fines, penalties, and legal troubles.
- Public Safety and Welfare. Certain businesses must follow health, safety, and environmental standards.
- Professional Standards. Certain businesses (doctors, lawyers, and real estate agents) need specific professional licenses to practice. These licenses ensure that professionals meet the qualifications to provide services safely and effectively
- Zoning and Land Use Local governments use business licenses to enforce zoning laws so that businesses operate in appropriate areas.
When Your LLC Needs a Business License:
- Starting a New Business. You must obtain the necessary business licenses if you’re in a regulated industry.
- Expanding to a New Location. If your LLC expands to a new city or state, you may need business licenses for the new location.
- Offering New Services or Products. If your LLC decides to offer new services or products that fall under different regulatory requirements, you may need to obtain additional licenses.
- Hiring Employees. Some states require businesses to obtain specific licenses when they hire employees.
- Complying With Industry-Specific Regulations. Certain industries have specific licensing requirements. It's crucial to research the specific requirements for your industry to ensure compliance.
Steps to Obtain a Business License for Your LLC
Here’s a step-by-step guide to securing the necessary business licenses for your LLC:
- Do the Research.Research the specific licenses your business needs. This can be done by checking with local, state, and federal agencies. Websites for government offices often provide information about licensing requirements (and fees). Be sure to budget for these fees.
- Apply for Licenses and Pay Fees. Once you know what licenses you need, complete the application forms and make payments. These forms are typically available on the websites of the relevant agencies. You may need to provide detailed information about your business (name, address, type of business, and member names). You can likely apply online, but in some cases, you might need to mail in your forms or deliver them in person.
- Wait for Approval. The approval process can take time, so be patient. Some licenses might be granted quickly, while others could take several weeks. Follow up if you haven’t heard back within the expected timeframe.
- Renew Licenses. Many business licenses need to be renewed periodically. Keep track of renewal dates and submit renewal applications on time to avoid licensing gaps.
Common Misconceptions About LLCs and Business Licenses
There are several common misconceptions about LLCs and business licenses. Let’s clear some of them up.
Misconception 1: An LLC Is A Business License. An LLC is a business structure, not a license. You still need to obtain the appropriate business licenses to operate legally. You must comply with all local, state, and federal licensing requirements.
Misconception 2: Forming An LLC Alone Allows Me To Operate My Business Legally. You do not need to be an LLC to run your business. Sole proprietorships, partnerships, and corporations are perfectly valid ways to own and structure your business. Still, owning a business does not mean operating it legally. You need to obtain the correct licenses for your business type and location.
Misconception 3: All Businesses Need The Same Licenses. The licenses you need vary greatly depending on the type of business you own and its location. What’s required for one company might not be necessary for another.
Misconception 4: Licenses Are One-Time Requirements. Many licenses need to be renewed periodically. If you forget to renew a license, you could face penalties (like fines) or even be barred from conducting business.
Seek Help To Get The Right Business Licenses Today
As an entrepreneur who wants to operate your business as an LLC, you need to understand the role of an LLC as a business entity and business licenses to operate legally.
To recap, an LLC is just one way to structure your business and have it legally recognized, Business licenses ensure you meet local, state, and federal regulations.
By securing both, you can avoid legal pitfalls, protect your assets, and focus on growing your business.
We encourage you to seek professional advice to meet all the legal requirements for your LLC, including obtaining the appropriate business licenses.
