If you've ever asked, "what is an LLC license," and want to know what it means for your company, it can be an important step in the early stages of setting up a new business.

What Is a Limited Liability Company

A limited liability company, or LLC, is a specific business structure that offers its owners, also known as members, a certain level of protection from being held personally accountable for the legal and financial obligations of their business. Limited liability companies are not required to pay federal taxes. This is because the company's profits are reported on the owner's personal tax return as income.

Starting a limited liability company is done at the state level. Members will need to file state-specific documents with the correct office, such as the secretary of state, to become licensed to conduct business. A limited liability company can have more than one owner or member:

  • If your company has only one member, it will be a single-member LLC.
  • If your company has more than one member, it will be a multiple-member LLC.

In most cases, your limited liability company will be what is known as "member-managed." This means that you and any other members involved will be directly responsible for managing the daily activities of the business. In some cases, however, members may choose to appoint a manager to handle the company's daily activity. This is what is known as a "manager-managed' LLC.

Formation of an LLC

While every state has its own requirements when forming a limited liability company, there are similar requirements in place no matter in which state you intend to conduct business. Your company's name, for example, must be completely unique from the names of any other companies currently doing business in the state. You'll also need to file required state paperwork along with your articles of incorporation, which lists the following information:

  • The owner's name
  • Your registered agent's information
  • The nature of your business

In some states, you'll need to provide proof of liability insurance as well as any applicable federal tax identification numbers. Many states will also require filing fees when you incorporate a new business. The limited liability company business structure is typically the easiest way to structure your company, particularly if you're interested in protecting your personal assets in the event that legal action is taken against your company.

Adopting the limited liability company structure can come with a number of benefits, such as:

  • Protecting you from legal action
  • Reducing the amount of required paperwork to incorporate
  • Preventing "double taxation"
  • Providing a measure of credibility for your business

Next Steps

As soon as your paperwork is approved, you will be officially licensed to conduct business anywhere in your state of incorporation. The LLC business structure provides a business with its own unique legal identity. This allows your company to do things in its own name, such as:

  • Accruing debt
  • Owning and leasing land
  • Buying and selling
  • Entering into legally binding contracts
  • Taking a political stance

Keep in mind that, in many states, your company may be expected to adhere to certain formal requirements, such as keeping financial records for the business separate from those of its owners and holding corporate meetings.

Which State Should You Choose?

If you're starting a new business for the first time, you likely have questions about where you should incorporate your business. There's quite a bit of interest in incorporating in the following places:

  • Delaware
  • Nevada
  • Wyoming

For the most part, however, you should incorporate your business in the state in which your company is physically located. Certain larger investors love working with companies based in Delaware because of the state's business-friendly legislation. This doesn't usually offer you, as the business owner, enough reason to take on the additional financial requirements and paperwork involved in incorporating your business in more than one state.

Similar to Delaware, Nevada, and Wyoming's business laws are somewhat relaxed compared to most other states, which is why they have become so popular among business investors. Unless your business is physically located in any of these states, however, you'll be required to incorporate as what is known as a "foreign LLC." Ultimately, this means you'll be required to pay additional filing fees and complete additional paperwork.

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