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Highlights and takeaways
- An LLC license is a term for the paperwork you get when creating an LLC.
- Your business is considered a sole proprietorship by default, unless you file the paperwork to form an LLC.
- The steps to forming an LLC are simple, but certain states have different requirements.
What is a limited liability company?
A limited liability company, or LLC, is a business entity that is treated as a corporation at the state level, but is taxed like a sole proprietorship or partnership at the federal level.
This means that the owners are shielded from liability, in that they themselves cannot personally be sued or go bankrupt—hence the “limited liability.” At the same time, profits from the business are only taxed once, on the owners’ personal income tax returns, instead of once at the corporate tax rate and then again as personal income (which is the case with C corporations).
What is an LLC license?
An LLC license is an unofficial term used to describe the paperwork creating a limited liability company. There is no actual license required to form an LLC, and an LLC doesn’t give you a license to operate a business. Instead, an “LLC license” is evidence that you run a company that’s registered as an LLC with your state.
The legal document that establishes an LLC is called articles of organization. Once this form is filed with your state, along with any other required documents and filing fees, your LLC is an active business. You can use those articles of organization as a de facto LLC license. Plan on handing over a copy of this document if you want to open a business bank account.
If your state offers a certificate of good standing or similar document, you may also use that to prove your business is legal and valid. If you have questions about LLC license and registration rules where you live, head to your state’s Secretary of State website for the details.
Tip: DBA is short for “doing business as.” A DBA registration is not the same as an LLC registration. In fact, your LLC can file a “doing business as” name in addition to the official LLC name.
Do you need a business license to form an LLC?
No—you just need to register your business as an LLC with your state. However, many specific types of businesses require another type of business license. You can find a list of examples further down.
How do you start an LLC?
By default, a business is considered a sole proprietorship even if you don’t register with your state. But there are some benefits, including liability protection and tax advantages, to choosing the LLC business structure. If your business is a considerable legal risk (this means any business that handles other people’s money or offers a service with a risk of client injury), or makes enough money to cover your full-time income, it may be worth considering creating an LLC.
The process of forming an LLC is slightly different in every state, but you can follow some common steps when creating an official limited liability company.
1. Choose a business name
You will start by choosing a business name, which you should ensure is not already taken in your state’s business registry. For example, if your business is in California, you would use California’s Name Reservations search. It’s also a good idea to check for trademarks and copyrights that could prevent you from using the company name.
2. File articles of organization
Next, you file articles of organization or similar forms with your Secretary of State’s office. You can do this yourself online or look to an expert to handle this for you. Before spending hundreds or thousands of dollars on a lawyer, look through the process to decide if you can take care of it on your own or would benefit from the assistance of a legal professional.
Every state law has different rules and regulations around business entities, including LLCs. If you own an LLC, you are considered a “member” of the LLC. You can operate as a single-member LLC or a multi-member LLC with partners. The ownership of your business is clearly explained in your articles of organization.
3. Choose your registered agent
An important decision to make when creating a limited liability company is choosing a registered agent. A registered agent is a person or business listed as the recipient of legal notices for your business. Because your registered agent requires a publicly available address, you may want to hire a professional instead of acting as your own registered agent.
A registered agent’s most important role is called service of process—they’re officially responsible for delivering legal documents that inform you of a pending lawsuit. Depending on the state, you may choose to act as your own registered agent to save money, but again that makes your personal information publically available.
4. Complete required documentation
Once registered with the state, it’s time to focus on the documents required to run the business. These may include an LLC operating agreement and any required licenses or permits. If you have any doubts or questions, it’s best to look to a legal professional who can guide you through the process.
Along the way, you should also sign up for an Employer Identification Number, an ID used for tax purposes. You can get an EIN from the IRS website. There is no filing fee required for an EIN.
Businesses don’t have to create a new legal entity in every state. Instead, you can use your LLC from another state as a foreign LLC, the technical term for an out-of-state business entity.
Fact: If you don’t complete the forms correctly and follow business operating requirements, you could lose the liability protection of an LLC. That could open you up to personal liability in the event of a business lawsuit.
Which states are the best to start your LLC?
Because LLCs are different from S or C corporations, and are subject to less regulation, the best state to start your LLC in is whichever state you live in. “Business-friendly” states may be more advantageous for other business entities, but it won’t matter much for your LLC.
In general, the steps you follow to register your LLC will be similar regardless of the state you’re in.
Business types that need an additional license to operate legally:
We’ve established that there is no actual LLC license needed to run a business, but many specific types of businesses require another type of business license.
Here are some common businesses that would likely require a business license to operate legally:
- Product sales. If you sell physical products, you may need to register for a sales tax license and reseller’s permit. These show that the business is established and permitted to sell products and collect sales taxes.
- Restaurants and food preparation. If you’re feeding anyone, you may need to meet health department rules. That could include license or permit requirements.
- Controlled items. Liquor, tobacco, firearms, and cannabis businesses typically follow strict distribution, sales, and tax regulations. These businesses may need additional permits or licenses to operate and sell.
- Professional services. Lawyers, accountants, and other professionals could be required to get licensed by a state or federal organization.
- Barbershops and cosmetology. If you cut hair, do nails, or other work classified under cosmetology, you could have a license requirement imposed through a state board. Service providers often run their own business and rent a booth from a salon, in which case each provider needs their own business registration and license.
- Medical services. Doctors, nurses, and other healthcare businesses may fall under specific license requirements. This often extends to non-medical areas like chiropractic care and massage therapy.
- Financial services. Any business that handles other people’s money is likely to fall under state and federal financial guidelines requiring extensive compliance.
- Transportation providers. Taxis, busses, trucks, trains, planes, and other commercial transportation companies operate businesses with a higher chance of safety accidents than many other industries. These businesses also often require additional permits or licenses.
- Mining and energy extraction. The heavy environmental impact of mining, oil drilling, and natural gas extraction put these industries in more regulations than others, also often requiring accompanying licenses and permits.
- Construction. In construction, you may need a permit for each specific job, plus a contractor’s license or another type of certification, license, or permit. As with other industries, working without proper permits can lead to fines and other penalties.
Note: this is not an exhaustive list. Many other businesses could be required to get a license or permit after registering as an LLC.
Contact your local government or a business licensing expert for more information if you’re having trouble navigating the requirements for your company.
How Bench can help
As America’s largest professional bookkeeping service for small businesses, Bench’s team of in-house bookkeeping and tax professionals have unique insights into the financial benefits and drawbacks of operating a small business as a sole proprietorship, LLC, S corporation, C corporation, or other business structure.
If you’re looking for advice or want to make a change to your business structure, start by downloading our free business entity guide. Curated by our team of experts, you’ll get a detailed overview of the pros and cons of each structure.
The bottom line on LLC licenses
So, what is an LLC license? There is no such thing as an LLC license! However, an LLC is a common business structure popular with small business owners for a long list of good reasons. You may need additional licenses or permits to run an LLC, but there is no specific LLC license requirement to create your business.
There’s no shame in bringing in expert help if you’re unsure how to form an LLC or if it makes sense for your business. When working with a team that includes trusted financial experts from Bench, you’re making good decisions to help your business grow and prosper far into the future.
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