How to Get a LLC License: Everything You Need to Know
Some cities require business licenses for LLCs operating within their city limits, while others require licenses for certain types of business activities.3 min read
Wondering how to get a LLC license? You're not alone. Some cities require business licenses for LLCs operating within their city limits, while others require licenses for certain types of business activities. Depending on the nature of your business, you may also have to obtain a state or federal business license.
An Overview of Limited Liability Companies
A limited liability company (LLC) is a type of business which is owned and managed by its members, who enjoy a level of personal liability protections for company debts. The LLC itself pays no federal taxes; instead, members declare their net incomes on personal tax returns. As such, an LLC protects its owners from personal liability without the more rigid structure of a full-fledged corporation.
Entrepreneurs often choose to establish an LLC to avoid corporate double taxation. Unlike a corporation, an LLC's revenue passes through the business onto individual members who then pay personal income taxes and self-employment tax.
How to Form an LLC
To establish an LLC, you must:
- Select the state where you want to establish the business – each state has different rules and regulations when it comes to forming an LLC, and you may need to register in multiple states if you plan to conduct business across state lines.
- Name the business – adhere to the rules associated with naming an LLC in your state, such as using the phrase “limited liability company” or one of its designators at the end of the name, avoiding prohibited terms, and choosing a distinguished name unlike any other currently in operation.
- File your Articles of Organization – an LLC is officially formed once you file its Articles of Organization with the Secretary of State (review the Secretary of State's website for a sample Articles of Organization).
- Create the LLC Operating Agreement – the Operating Agreement will outline member rights and responsibilities, the amounts of capital contributed, who will manage the business, dissolution procedures, and other pertinent information.
- Publish a notice – some states require you to publish a notice in your local newspaper stating your intent to form a new LLC.
One thing to keep in mind: many states require annual taxes and reporting fees for LLCs. California, for instance, charges a minimum of $800 on top of the normal income tax rate.
After completing these basic steps, it's time to analyze the issue of raising capital from investors.
Most business owners turn to family members, venture capital firms, angel investors, or their own savings to come up with the money needed to start their businesses, but there are a few things to keep in mind:
- Every investor should be made aware of the risks associated with the investment. Don't make false representations; be upfront about the risks involved so investors are prepared for potential losses.
- Certain investors, especially venture capital firms, will only invest in corporations. When you're establishing an LLC, you'll probably have better luck with angel investors and other sources.
- Always get good legal advice before issuing LLC units to investors. It's important to abide by federal and state securities laws so you don't run into legal trouble.
When attracting investors, it's essential to spell out their rights to profits, tax benefits, voting, distributions, and other factors. State these clearly in your LLC's Articles of Organization and the investor rights agreement.
Obtain an EIN
Next, you should get an employer identification number (EIN) from the IRS. This number is required if you hire employees for your LLC, but it also serves as a federal tax identification number, which you can use in place of your personal Social Security number.
You can apply for an EIN on the IRS website. The process is simple and free.
Apply for Your Business License
After you've officially established your LLC, you can obtain the necessary business licenses. Some businesses may only require a local license and permit, while others will need to apply for a state or federal license. For example, a restaurant which serves alcohol will need a separate license and permit to operate.
Your city may also have specific requirements. San Francisco, for instance, requires business licenses for companies operating within the city limits. Chicago, on the other hand, requires you to have a license for certain business activities, including manufacturing, daycare, entertainment venues, restaurants, retail, motor vehicle repair shops, and more. Check with your city to learn which licenses and permits you need based on your type of business.
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