As a business owner, it’s important to understand the legal requirements and regulations for your business and be aware of the necessary licenses it might need to operate legally. In the United States, two common concepts you should be aware of are a Business License and a Limited Liability Company (LLC). A Business License and LLC are two different legal structures with distinct purposes. A Business License is a permit that allows you to legally operate your business within a specific area, while an LLC provides limited liability protection for the members, and functions as a separate legal entity.
What is a Business License?
A Business License is a permit issued by the state or local government that allows you to legally operate your business within a specific area. The license is a requirement for businesses operating within the city or county where they are located and the nature of the requirement varies from location to location. The specific requirements for obtaining a Business License may vary depending on the type of business you operate and your location.
As discussed later in this article, there are a few different types of Business Licenses, including General Business Licenses, Professional Licenses, Sales Tax Licenses, and Health Permits.
Obtaining a Business License usually requires that you complete an application and pay a fee to the relevant authority issuing the license. The fee may vary depending on the type of business you operate and the location. If you’re operating out of multiple locations, it may be necessary to acquire multiple business licenses. This is entirely dependent on the location of your business and the type of business you are conducting.
The best way to determine if you need a business license is to consult a lawyer or contact your local small business development center. Alternatively, you can always look up the rules and requirements for your state and city yourself online.
What is an LLC?
A Limited Liability Company (LLC) is a type of legal entity that provides liability protection for the owners of the business – the owners of which are referred to as members of the LLC. An LLC is a separate legal entity from its members (or owners), which means that the business can be sued, enter into contracts, and own property in the name of the LLC.
One of the primary benefits of an LLC is that it provides limited liability protection for the members. This means that if the business is sued or goes bankrupt, the personal assets of the members are protected. Another benefit of an LLC is that it allows for pass-through taxation, meaning the profits and losses of the business are passed through to the members, and they are only taxed on their personal income tax returns.
Business License vs. LLC Comparison Chart
|Issued by local government
|Formed through a state registry
|Requirement depends the on location of the business
|Optional entity recommended for certain liability protection
|No limited liability
|Provides Limited Liability to members
|Pay taxes as a sole proprietorship or partnership
|Choice of paying taxes as an S-corporation or Partnership
|No transfer of ownership
|Ownership is easily transferred
Who needs a Business License?
Typically in the USA, when a person engages in certain types of business activities, such as selling goods or services, operating a food establishment, or conducting specialist/professional services, a license is required. The type of business conducted which requires a license varies from state to state. The requirements for obtaining a Business License may also vary depending on the type of business you operate and your location. Failure to obtain a Business License can result in fines or legal action, so it’s important to ensure that you have the necessary permits and licenses to operate your business.
The process of applying for a Business License usually involves making contact with the appropriate government agency to determine the correct license required, completing an application form containing basic information about your business (address, ownership structure, and nature of the goods or services provided), providing any additional documentation, and paying the relevant fees.
Types of Business Licenses
Depending on the nature of the business there are various types of Business Licenses. Some of the most common types of Business Licenses include:
- General Business License – This is a standard license that most businesses require to operate. It is typically obtained from the city or county where the business is located.
- Professional License – This license is required for businesses that provide professional services such as doctors, lawyers, and accountants.
- Sales Tax License – This license is required for businesses that sell goods and services and are required to collect and remit sales tax.
- Health Permit – This permit is required for businesses that prepare and sell food or provide food services.
The specific requirements for obtaining a Business License will depend on the type of business you operate and your location. Generally, you will need to complete an application, pay a fee, and provide proof of insurance and any necessary certifications.
Frequently Asked Questions
No, a Business License is a permit issued by the government for businesses to operate legally, whereas an LLC is a separate legal entity that offers liability protection and might be tax beneficial.
Not every business needs an LLC. The use of an LLC depends on a range of factors such as the business’s legal structure, size, risk levels, and liability protection.
Although there are many types of business that require licenses (sale of goods and services, restaurants, professional services etc) each location has its own rules and regulations. It would, therefore, be best to consult your local government agency to establish whether a license is required for your particular business. Failure to obtain one can result in fines and penalties.
The cost of obtaining a Business License varies depending on location and type of business, however, costs can range from a few hundred dollars to several thousand dollars.
The cost of forming an LLC varies depending on the state, but can range from anything from $50 to $500, excluding ongoing fees, annual costs, and taxes.