Business License Vs. LLC: What's the Difference?
Entrepreneurs starting on a business often find themselves navigating through an array of complex legal requirements. Topping the list of searches are two terms that can trip up even seasoned business owners: “business license” and “LLC”.
Maybe you'll even Google "Is LLC a business license?" Maybe they mean the same? You might need to apply for both, but what’s the difference exactly? And do you really need them?
A business license is permission from your city or county to operate within its jurisdiction. An LLC (or limited liability company) is a type of formalized legal entity that offers all its owners, known as members, personal protection against some lawsuits.
Understanding what sets these two concepts apart will put you ahead when it comes time to make important decisions about starting and running your own company. Let's start!
- An LLC gives liability protection, while a business license allows operating legally in an area.
- LLCs offer tax benefits and pass-through taxation, while business licenses don’t.
- You get an LLC by filing with a state, while you usually get a business license from local or state government agencies.
- LLCs protect personal assets from business debts; they do not protect like this for business licenses.
- Business licenses often require renewal and compliance with local regulations, while LLCs have different ongoing requirements, such as annual reports.
What Is a Business License?
If you want to operate a business in a specific area, such as a city or state, you’ll need official permission – called a business license – from the relevant government body.
This permit is effectively an acknowledgment that your company has agreed to stick to local laws and regulations.
For example, if you’re running a small bakery in Portland, Oregon, then you will usually have to get hold of one of these licenses either from the local county or directly from the city itself.
Doing this will mean filling out an application form and paying certain fees. In many cases, it also involves inspections by people checking on health and safety compliance.
Once obtained, it validates that your bakeshop obeys all necessary zoning rules plus any other standards designed to ensure public health and well-being – meaning what it sells is legal.
Types of Business Licenses
To navigate the complex realm of business operations, it’s essential to familiarize yourself with various types of business licenses. Here are three common types you’re likely to encounter:
Federal Business License
If a business is involved in activities that are regulated by a federal agency, then it will need to have federal business licenses.
For instance, if your company deals with meat processing, drug manufacturing or even broadcasting, you’ll need to secure such licenses – provided the type of your firm’s activity falls within the remit of a given national law.
To get one often means going through an application process where stringent standards must be met. That license will ensure industry players comply with national laws specific to their sectors.
State Issued Business Licenses And Permits
If you want to operate certain types of businesses on a statewide basis, then at the state level, it is mandatory that you obtain permits and business licenses.
This category contains healthcare providers, lawyers, and real estate agents, as these are professions that require specific expertise. Also included in this category are businesses that sell gasoline, lottery tickets, or alcohol because they need state-specific permits.
State-issued business licenses and permits help ensure that businesses meet state standards for health, safety, or professional conduct.
How to get the documentation, what’s needed for the application process, and how often renewals must occur – all vary depending on your profession and where you’re based.
More generally speaking, cities most likely will also require a local trade license if you want to hang out your shingle in town.
Local Business License
To legally operate within a specific area, most businesses need a local business license. City or county governments issue this license, which makes sure that the business complies with any applicable laws and regulations for that locality –including zoning laws and health and safety standards.
An example is a restaurant in a city that needs to get a local business license to be able to operate. This might mean it needs to follow food service rules established locally and have its kitchen pass inspections conducted by the health department.
Typically, getting such local licenses involves submitting applications to local governments, paying fees, and sometimes having an inspector come out. Usually, most business licenses need renewal each year.
How to Obtain a Business License?
Here are five general steps that can guide you through the process of obtaining a business license, which can vary in complexity and requirements depending on your location and the type of business you plan to operate.
1. Research Your Requirements
Find out what specific licenses or permits your locality requires for businesses like yours. Start by calling your local city or county government for guidance, or check their website for information on which licenses you need.
Also, determine how your licensing requirements differ based on your business structure—such as sole proprietorship, LLC, or corporation.
2. Complete Necessary Paperwork
Once you know which licenses are required, round up all the necessary paperwork and forms you’ll need to apply for them. These could include a completed business license application, zoning permits, health permits (particularly if customers will be visiting), and any other relevant forms.
3. Submit Your Application
Accurately complete the license application and make sure you do not leave anything out. If there are special regulations or fees, note them in the instructions for submitting an application.
Send your completed form and any additional papers to the relevant local government office or agency that handles business licenses—the city clerk's office, county clerk's office, or a licensing department.
4. Pay the Required Fees
Be ready to pay when you apply for your business permit. Due to location and company category, these costs may differ significantly. Future renewal charges might be required with some permits.
Plan accordingly so that you know what it will cost over time to maintain this permit once issued.
5. Await Approval And Compliance Inspection
Once you have submitted your application and paid the required fees, it's time to wait for local government officials to review your documents and conduct inspections if needed.
They're making sure that you meet their requirements, such as compliance with zoning codes, health and safety standards, or any other rules specific to your type of business.
If everything checks out – including passing any necessary inspections – you'll get a license permitting you to do business in that location. You'll usually need to display this license in public view at all times once received.
What Is an LLC?
An LLC stands for Limited Liability Company. It's a business structure that merges features of a corporation and either a partnership or sole proprietorship, offering personal liability protection to its owners (members) and protecting their personal assets from business debts and court judgments.
For example, if an LLC operating a coffee shop spends all its money going bankrupt or facing lawsuits, typically, the owner's personal assets (homes, bank accounts) won't be at risk.
The LLC also delivers tax advantages because profits and losses can be passed through to members' individual income without facing corporate taxes.
Its popularity with small- to mid-sized businesses comes down to flexibility combined with protection.
Types of LLCs
LLCs come in various types, each with its own distinctions and advantages that suit a range of structures and business requirements—from those working alone to complex networks of companies.
When a limited liability company (LLC) has just one business owner, it’s known as a single-member LLC. This hybrid business structure combines the informality and ease of ownership seen in a sole proprietorship with the legal benefits — such as personal asset protection — that come with an LLC.
Single-member LLCs are common among individual entrepreneurs who want to keep their small businesses separate from their personal finances for tax and legal reasons.
For example, let’s say you work as a freelance graphic designer; forming an SMLLC could offer extra liability protections while allowing you to manage your business simply and independently.
Taxation is also relatively straightforward: The IRS usually taxes these business entities like sole proprietorships by default unless you choose otherwise.
The formation of Multiple-Member LLC firms is done by a group of individuals who each own a portion of the firm. This business structure provides liability protection to all owners, much like a corporation, while allowing them to split management responsibilities and profits.
It’s best for businesses where more than one person has an active role in running things. For example, it could work well for a small consulting firm started by several professionals.
In terms of splitting up losses and gains, Multiple-Member LLCs can do whatever their agreement allows. The structure also gives flexibility when it comes to deciding how the company should be managed.
For tax purposes, this type of business typically gets treated as if it were a partnership unless its owners decide they’d like it to be taxed as if they were an incorporated entity instead.
A Series LLC is quite unique as it lets you create multiple ‘series’ (or ‘cells’) within a single, overarching LLC structure. Each series can have separate members, own distinct assets, and operate independently – all under the umbrella of the main LLC.
This makes them ideal for businesses that need to keep different projects or property investments apart from each other, so risks are isolated.
For example, a real estate company might use a Series LLC to manage several properties separately so each one is protected from any liabilities generated by the others.
Please note that not all US states allow Series LLCs: among those that do, rules and tax treatment can vary significantly.
The Process of LLC Registration
When registering a Limited Liability Company (LLC), it is necessary to go through a series of legal steps to set up your business entity.
The process can vary slightly, depending on state requirements, but here are five general steps to guide you through the LLC registration process:
1. Choose a Business Name
First, select an exclusive and legally compliant name for your LLC. Ensure that the name meets your state's naming rules - this typically means including 'LLC' or something similar in the name.
Find out if your preferred business name is available in your state by searching its business-entity database.
2. Designate a Registered Agent
Select a registered agent for your LLC: someone whom you formally designate to accept any official correspondence and legal documents sent to your company.
Your registered agent must have an address within the same state where you registered your new LLC and be available during normal working hours.
3. File Articles of Organization
Next, prepare and submit Articles of Organization – occasionally called Certificate of Formation or something similar – with the appropriate office responsible for handling business registrations within your state.
This document officially establishes an LLC as a legal entity. Within this submission should be key information about the legally recognized business entity, such as:
- The desired name
- Data about each registered agent
- The purpose(s) behind forming an LLC
- Management structure
- Names/addresses of all members/organizers
4. Create an Operating Agreement
Though not always obligatory, it is strongly advised that you create an LLC operating agreement. This document outlines your company’s ownership structure, management roles, and operating procedures.
Even if your state doesn’t demand this document be created, creating one can help clarify relationships among members of the LLC and provide key legal protections.
5. Pay Filing Fees And Obtain EIN
Pay the filing fee required for your Articles of Organization as stipulated by your state; fees may range from a small amount to several hundreds of dollars.
Apply for an Employer Identification Number (EIN) from the IRS if there are multiple members in the LLC or there will be employees hired – this number is necessary for tax purposes and opening a business bank account.
6. Complete Additional State Requirements
Additional requirements might need to be handled depending on both 1) what state you’re in and 2) what sort of business you have.
Examples include getting specific licenses or permits (for example, sales tax license) for business operations, registering for state taxes, or complying with industry-specific regulations.
Is LLC a Business License?
An LLC (Limited Liability Company) is not a business license but rather a legal structure for a business. It provides limited liability protection to its owners, who are called members and separates personal assets from the business’s debts and liabilities.
In order to form an LLC, you must register with your state agency that handles businesses—usually the Secretary of State—and follow the state-specific rules. Forming an LLC doesn’t take the place of obtaining a business license; it’s just one step along the way.
A business license is an official permit to operate a business in a specific jurisdiction or area. Obtaining one is generally not part of forming an LLC and may be required for your type of company and where you’re located.
For anyone about to set up a business, knowing the difference between a business license and an LLC is vital.
Getting licensed is about being compliant, then forming an LLC is about setting yourself up for success from both financial and risk standpoints. But choosing one doesn’t mean skipping the other; many businesses are required to have both a business license and LLC.
Frequently Asked Questions
How Long Does It Take to Get a Business License?
The time it takes for you to receive your Business License depends on where you are located and what type of business you have. Generally, expect anywhere from several days up to a few weeks.
How Do I Start a Limited Liability Company (LLC)?
To form an LLC, there are several steps: come up with your business name; file Articles of Organization with the appropriate agency within your state government (called its Secretary of State in most cases); create an operating agreement; apply for and receive any other required licenses or permits (such as EIN from IRS).