Is An LLC A Business License? 7 Steps to Figuring Out What You Need

Last updated 04/03/2024 by

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Summary:

An LLC, or limited liability company, is a structure used for tax, risk, and contractual purposes, not a business license required for legal operation. While LLCs allow for business transactions and partnerships, even internationally, they do not replace the need for a business license in specific industries or locations. Understanding the distinction between LLCs and business licenses, along with the requirements for each, is crucial for legal business operations.

Many people when they form an LLC, think that they can do whatever they want now. Of course, there are a lot of things one can do with an LLC, but it doesn’t necessarily mean they can legally operate in certain industries. An LLC is not a business license. An LLC, or limited liability company, is a way to structure a business for tax reasons, while a business license is needed to operate a business legally.

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Is an LLC a business license?

No, it’s not. An LLC, or limited liability company, structures a business for tax, risk, and contractual purposes, whereas a business license is necessary to start and operate a business legally. That being said, having an LLC does allow a person to enter into business transactions with an LLC. It’s typical for LLCs to partner with other companies overseas that might have business licenses in countries that an LLC is unable to obtain.

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How does an LLC work?

Many entrepreneurs and business owners in the United States and across the globe are familiar with Limited Liability Companies, or LLCs, a business structure that provides personal liability protection to its owners while offering flexible tax treatment options. Contrary to the common misconception linking LLCs to the Dutch East India Company—a pioneering model for the corporate structure—the LLC as we know it today is a relatively modern legal innovation, specifically designed to combine the liability protections of a corporation with the tax efficiencies and operational flexibility of a partnership.

The concept of the LLC did not find its way into American law until the late 20th century. Wyoming was the pioneering state, introducing the LLC structure in 1977 as a response to the needs of business owners seeking the liability protections of corporations without their stringent tax and operational requirements. This legislative innovation aimed to attract more business ventures by offering an appealing alternative to the traditional corporation or partnership models. The IRS did not provide clear guidelines on how LLCs should be taxed until 1988, which initially led to hesitance in their adoption. However, after the IRS ruled that Wyoming’s LLCs could benefit from pass-through taxation, similar to partnerships, the LLC structure gained rapid popularity nationwide.

Pro Tip

“One of the primary advantages of forming an LLC is the limited liability protection it offers its owners, known as members. Unlike sole proprietorships and partnerships, where the owner’s assets are at risk in case of business liabilities, an LLC shields its members from personal liability. This means that the member’s personal assets are generally protected in the event of lawsuits or debts incurred by the business.” – Erik Severinghaus, Founder and CEO of Bloomfilter

LLCs allow you to enter into contractual agreements

LLCs (Limited Liability Companies) can indeed enter into contracts with other corporate entities, and this is indeed a form of doing business. An LLC, like other business entities such as corporations, has the legal capacity to enter into agreements, contracts, and transactions with other entities and individuals. This ability is one of the fundamental aspects of conducting business and allows LLCs. So, although LLCs aren’t a business license, per se, they do allow you to enter into contracts that you might not otherwise be able to. For instance, you can have an LLC enter into a partnership with an auto company in Vietnam, even though your LLC is US based, and you have no license whatsoever for the Vietnamese market.

“One of the most valuable reasons to get an LLC for an entrepreneur’s small business is liability protection. LLC owners are not personally liable for the debts and obligations of their businesses. LLCs eliminate the possibility for any personal lawsuits against you on a state level protecting your assets. Another main reason to form an LLC is that it allows your business income to be taxed as personal income minimizing your tax liability. Having an LLC in place also gives you more credibility with customers and other businesses and allows you to more easily open bank accounts, hire employees and get necessary permits and licenses.” – Scott Lieberman, author of the Most Profitable Online Businesses

Business licenses vs. LLC structure

A business license, issued by local governments, allows you to operate a business in a specific area, differing from an LLC’s structure. Not all businesses need a license, especially those operated from home or online without a physical presence. However, certain home-based businesses, like daycares, may require licenses or permits. Compliance with homeowner’s association rules may also be necessary for home-based businesses. An LLC regardless of a business license, can be used for some of the following business transactions.

Purchase or lease property
Hire employees and contractors
Buy, sell, and provide goods or services
Enter into partnership agreements
Obtain financing and open bank accounts
Sue or be sued in connection with business activities

Business Licenses and how to get them

Business license requirements are different for every state. Alabama and Alaska for example, require that every business have a general business license. Some states focus more on specific types of permits and licenses rather than issuing a general business license. These can include environmental permits, health department permits, and professional licenses. For business licenses, they are typically the following:

How to know if you need a business license for your business in your state

Figuring out if you need a business license and obtaining one is crucial for operating legally. Follow these steps:

Understand Your Business Structure and Industry: Identify your business structure (e.g., LLC, sole proprietorship, corporation) as different structures may have different licensing requirements. Determine your industry, as specific industries often have unique licensing requirements.
Check State Requirements: Visit your state’s official government website or the Secretary of State’s website to find information on business licenses. Some states do not require a general business license but may have specific requirements for certain industries.
Check Local Requirements: Contact your local city or county government office (such as the City Clerk’s office) to inquire about local business license requirements. Local governments often have additional licensing requirements that are not covered by the state.
Industry-Specific Licenses: If your business is in a regulated industry (e.g., healthcare, food service, construction), check with the relevant state regulatory agencies for industry-specific licenses.
Apply for Necessary Licenses: Once you’ve identified the licenses you need, complete the application forms provided by the state or local government. This may often be done online. Pay any required fees associated with the license application. Fees vary depending on the type of license and the jurisdiction.
Keep Track of Renewal Dates: Business licenses have expiration dates and need to be renewed periodically. Keep track of renewal dates to ensure your business remains compliant.
Comply with Additional Requirements: Some licenses may have ongoing requirements, such as periodic inspections or continuing education. Ensure you understand and comply with these requirements to maintain your license.

General requirements

While some states may require a general business license for all businesses operating within their borders, others may not have a statewide business license requirement at all. Instead, they might require licenses at the local or county level.

Industry-specific licenses

Many states require specific licenses for certain industries, such as healthcare, construction, food services, and financial services. These licenses ensure that businesses meet the specific standards and regulations necessary for their industry.

Local licenses

In addition to state requirements, many local governments require businesses to obtain a local business license to operate within their jurisdiction. This is common in states that do not have a general statewide business license.

Experts Insight

“The way we’re collaborating is changing rapidly. It’s obvious to see how remote work and before that the internet changed the way we collaborate. No longer do we have to look locally for talent or even in the same country for that matter. We can search globally for experts in the most epic niches, which is especially critical when building technologies on the bleeding edge. The expert you’re looking for in fully homomorphic encryption standards is simply a Google away in a far away land you might never travel to. In many cases we don’t even have to look for the talent we can place ads out and let the talent find us.

What’s obvious to me is that blockchain is stacking on top of this in the most beautiful way. We’re coming to a total polarity shift in the world where new systems won’t need any of the old systems to operate. It’s not hard to imagine a near-future where permissioned, centralized, licensed mechanisms are anachronistic and unfamiliar. Blockchains are more efficient at solving the same coordination problems that the traditional corporate structure tackles. By providing a neutral way to settle transactions and reach a shared conclusion on truth, a lot of the frictions of traditional corporate structures are disintermediated.” – Alan Scott, Contributor at Railgun

Forming an LLC

To form an LLC, comply with your state’s laws. There’s usually no requirement to live in the state where you’re forming the LLC. You’ll need to select a unique name for your LLC, follow state-specific naming rules, and file various forms along with a fee. Your LLC’s name must often include “LLC” or “limited liability company” and avoid certain restricted words. There are several different types of LLCs, but the majority of LLCs (over 70%) in the United States are Sole Proprietorships or pass-through LLCs. Below are some of the different types of LLCs you might encounter.

Type of LLC	Description
Single-member LLC	For solo entrepreneurs, offering liability protection similar to a sole proprietorship.
Multi-member LLC	Businesses with more than one owner can be member-managed or manager-managed.
Domestic LLC	An LLC operating in its state of formation.
Foreign LLC	An LLC operating outside its state of formation.
Professional LLC (PLLC)	They are designed for licensed professionals such as doctors, lawyers, and accountants.
Nonprofit LLC	An LLC that operates for charitable purposes, is not recognized in all states.
Low-Profit LLC (L3C)	A for-profit LLC with a primary goal of achieving a socially beneficial purpose.
Series LLC	Allows the creation of separate “series” within an LLC, each with its members, managers, and assets.
Anonymous LLC	Forms an LLC without disclosing the owners’ names in public records, available in some states.
Restricted LLC	Has restrictions on distributions to members for a certain period, available in certain states.

LLC requirements

While forming an LLC doesn’t require a license, there are several requirements. Most states require a registered agent to accept legal documents for the LLC. You must draft and file Articles of Organization, listing your LLC’s name, appointing a registered agent, and possibly stating your business purpose and management structure. Filing fees vary by state, ranging from $50 to $350. Consider creating an operating agreement to outline how your LLC will operate.

Aaron Evans, a leading expert at Moonbeam, provides insight into the evolving landscape of blockchain technology.

Blockchains are driving innovation in how groups of people with a common purpose organize themselves, most notably through DAOs and systems of on-chain governance:

Using smart contracts and voting mechanisms, DAOs/governance can facilitate faster and more efficient decision-making processes in an automated way, reducing bureaucracy and delays.
Moreover, these decisions are recorded on the blockchain, creating transparency to stakeholders fostering a sense of community and inclusion.
Governance is generally decentralized, meaning decisions are not controlled by a central authority but rather distributed among members according to the rules of smart contracts, etc. This helps to mitigate risks of corruption or manipulation by a single entity.
The use of digital assets can be made part of the solution in order to incentivize participation and contributions from community members. This drives better alignment toward the growth of the project or organization and fosters a motivated and engaged community.

FAQ

Can an LLC operate without any business license?

No, an LLC cannot operate without the necessary business licenses and permits. While forming an LLC establishes the legal structure of your business for tax and liability purposes, business licenses are required to legally operate in many industries and jurisdictions. The specific licenses needed depend on the type of business, its location, and the regulations of the local and state government.

How does having an LLC affect my taxes?

An LLC is considered a “pass-through” entity for tax purposes, meaning the business itself does not pay taxes on its income. Instead, the profits and losses of the business “pass through” to the owners (members), who report this income on their personal tax returns. This structure avoids the double taxation that corporations can face. However, LLCs can choose to be taxed as a corporation if it benefits them.

What’s the difference between a ‘member-managed’ and a ‘manager-managed’ LLC?

In a member-managed LLC, all members (owners) actively participate in the business’s day-to-day management decisions. In contrast, a manager-managed LLC designates either a member or an external manager to handle the daily operations, allowing other members to be passive investors. The choice between the two depends on the members’ preferences for involvement in management.

Are there any businesses that cannot be formed as an LLC?

Most types of businesses can be formed as an LLC, but there are exceptions based on state laws. For example, certain professional services such as law firms, medical practices, and accounting firms may need to form as a Professional LLC (PLLC) depending on the state. Additionally, some states may restrict certain industries from forming an LLC, so it’s important to check the specific regulations in your state.

Key Takeaways

An LLC is not a substitute for a business license; it’s a business structure for tax and legal purposes.
LLCs can enter into contracts and conduct business transactions, including international partnerships.
Business licenses are required for legal operation in certain industries and vary by state and local jurisdictions.
To determine if you need a business license, check state and local requirements, consider your industry, and comply with any specific licensing processes.
LLCs offer various forms, including single-member, multi-member, and specialized types like PLLCs and L3Cs, each with unique characteristics and purposes.

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