When you’re forming and running a business, things can be confusing. LLCs are sometimes misconstrued as business licenses, but is an LLC a license? The short answer is no. An LLC (a limited liability company) is a way to structure a business for tax and administrative purposes, while a business license may be required to open a business. This guide will take an in-depth look at the differences between LLCs and business licenses.
What is an LLC?
LLCs are the most popular business structure; there are several types of businesses, but LLCs are among the most popular. If you structure your business as an LLC, you’ll get some of the benefits of a corporation and some of a partnership. One of the most significant benefits is limited liability protection. If you form an LLC, you’ll receive advanced liability protections, similar to a corporation, but without rigid structures. Individual states regulate LLCs, so they’re not subject to federal income taxes.
An LLC can be taxed in several ways for IRS tax purposes – an LLC can pay business tax as a:
- Sole proprietorship
- Corporation
- Partnership
One of the key reasons to form an LLC is that members avoid the double taxation that the IRS applies to corporations. LLCs aren’t required to file income tax returns, unlike a corporation. Since LLCs aren’t taxed at a federal level, members of the LLC pay taxes on their incomes after revenue has been distributed. This is known as pass-through taxation.
Forming an LLC
Forming a new business that’s compliant with local laws is crucial. An LLC is a business entity that business owners, from multi-national to small businesses, rely upon. There are some requirements for starting an LLC; luckily, you don’t need to be resident in the same state as your LLC registrations.
Researching the business name registry in your state is ideal; you’ll need to be certain that your LLC name isn’t being used already. While registering your LLC, you’ll need to file various forms and pay a fee; before that, you’ll need to select your name. Your state may also have specific requirements for a business name, and it’s likely you’ll need to include “Limited,” “LLC,” or “Limited Liability Company.” There are sometimes restricted or prohibited words, too.
LLC requirements
There are a few LLC requirements to abide by. Most states require a service of process sent to an LLC to be filed by a registered agent. You’ll need to file an Articles of Organization. The Articles of Organization will include the LLC name, your registered agent details, and, in some states, your business purposes. You may need to list your LLC’s manager and members and describe your company’s operation. This will vary by state, but the vague process is the same. You can consult your local government or Secretary of State office for further information. You’ll need to pay a state filing fee, which can be as little as $50 or as much as $350. You may also need to list your LLC’s manager and describe how your company will be operated. Optionally, you can write an operating agreement for your LLC. An operating agreement dictates how your company runs.
Business licenses
Business licenses are government-issued licenses that give you the right to operate and open a business in the jurisdiction where the license was acquired. A license is not a business structure or taxation type; therefore, it’s different from an LLC. The municipality where you start your business will issue you a business license.
Only businesses open to the public require a license. Home-based businesses don’t require a license to operate. You won’t usually need a license if you sell goods over the internet. Online companies are usually exempt, as small business owners without a physical store seldom require a license.
However, some home-based businesses will require a permit or license, depending on business activities and professional licensing requirements. Daycares are one such business type. In addition, if there’s a homeowners association in your neighborhood, you may need to comply with additional rules before opening your home-based business.
Do I need a business license?
Once you’ve registered your business as a legal entity, established a business bank account and employer identification number, and registered for annual reporting, you can turn your attention to business licenses.
A business license may refer to specific licenses, seller’s permits, zoning, or even a DBA (doing business as). There are plenty of exemptions for business license requirements, and you can always check with your local government office for specific requirements. You can also use the SBA’s Small Business Tool to find out what local licenses your startup may require, but we’ll look at some of the basic business licenses you might need.
Sales Tax Licenses
Sales Tax Licenses are required if you need to chart sales tax. The licensing requirements and correct sales tax amount may vary. The retail sales tax rate in Florida is 6%, and it’s 6% in the state of Michigan. In the State of California, sales tax is 7.25%.
General business license
Most states don’t require a general business license – just to operate a business in a state. Depending on your state government, you might require a state-level business license; in others, you’ll need a city or county-endorsed license.
Special permits
Many industries require special permits to operate. If you run a traditional brick-and-mortar business, you’ll probably require signs, fire, building, zoning, and planning permits before you can open your business.
Industry licenses
You may require specialized licenses to perform your services in several industries, including law, childcare, electrical, etc. You should consult the relevant licensing board in your state.
Federal licenses
Some industries require specialized licenses, including firearm sales, alcohol, and aviation. Federal permits are required if the federal government regulates them. The small business administration lists which businesses require licenses and where you can apply.
Wrapping up
Entrepreneurs starting a small business will probably start an LLC and pay taxes as a sole proprietor; most small and online businesses won’t need to apply for additional licenses. Still, if you do need them, it’s best to keep yourself in good standing by applying for any necessary and local state business licenses.
Licenses may be required for federally regulated industries and other specific business activities. You should check your local regulatory bodies and the Secretary of State’s office or reach out to a business attorney for advice before you apply for business licenses.
