Is an LLC a Business License: Everything You Need to Know
Let's explore the differences between LLCs and business licenses in closer detail. 3 min read
Is an LLC a business license? The short answer is no. A limited liability company (LLC) is a method of structuring a business for tax purposes, while a business license is required in order to open a business. Let's explore the differences between LLCs and business licenses in closer detail.
What is a Limited Liability Company?
LLCs are a very popular business structure. If you structure your business as an LLC, you'll be getting the best characteristics of corporations and partnerships, including liability protections for the owners of the company. If you form an LLC, you will receive the advanced personal liability protections of a corporation without the rigid structure. Individual states regulate limited liability companies, so they aren't subject to federal income taxation.
Another big advantage of LLCs is that members can choose how the company will be treated for IRS tax purposes. An LLC can be taxed as a:
- Sole proprietorship
A common reason to form an LLC is that members can circumvent the double taxation that the IRS applies to corporations. LLCs, unlike a corporation, are not required to file income tax returns. Instead, the members of the LLC will pay personal income taxes after revenue has been distributed. This qualifies an LLC as a pass-through entity.
Forming an LLC
Complying with the specific laws in your state is the most important part of forming an LLC. Luckily, there is typically not a residency requirement for starting an LLC, meaning you do not need to live in the same state where you are registering your company. When registering your LLC, you will need to fill out and file a variety of forms and pay a fee. However, before you begin the formation process, you need to select a name for your LLC.
Research the business name registry in your state so that you can be certain the name you've picked for your LLC isn't currently being used by another company. You should also learn the specific naming requirements in the state where you intend the form your limited liability company. For instance, it's likely that you will be required to include an abbreviation such as “LLC” or the phrase “limited liability company” in your name. There will also probably be words that are restricted or prohibited when naming LLCs.
Although you do not need a license in order to form your LLC, there are a few requirements you will need to meet. Most states, for instance, require that service of process sent to an LLC be accepted by a registered agent.
To form your LLC, you will also need to draft Articles of Organization and file them with your state. When completing your Articles of Organization, you should remember to include the name of your LLC and appoint a registered agent for your company. While not always a requirement, some states also request that you list your business' purpose in your Articles of Organization. You may also need to list your LLC's manager and describe how your company will be operated.
Typically, you will need to pay a filing fee. This fee can be as little as $50 or as much as $350.
You should also think about writing an operating agreement for your LLC, which will dictate how your company will be run.
Is a Business License the Same as an LLC?
Business licenses are government issued documents that give you the right to open and operate a business in the jurisdiction where the license was acquired. A license is not a business structure, and therefore is different from an LLC.
The municipality where you are starting your business will issue you a business license. Only businesses open to the public will need to apply for a business license. In many areas, businesses operated out of a person's home do not require a business license. For example, if you are selling items over the internet, you generally will not need a license. Similarly, businesses with only a website, that do not have a physical store, probably won't need a business license. However, there are some home-based businesses, such as daycares, that do require business licenses or permits.
In addition, if there is a homeowner's association in your neighborhood, you will need to comply with all HOA rules before you will be able to open your home-based business.
If you need help forming an LLC or applying for a business license, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.