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One of the most exciting times for an entrepreneur is starting a business. You can see all of your professional dreams coming together and being realized – if only forming a business involved fewer steps.
If you’re a small business owner, you’ve probably toyed with the idea of starting an LLC while simultaneously wondering if you need to obtain a business license.
Business licenses are essential in specific situations, and many LLCs do not require them.
- So, what is the difference between a business license and an LLC?
- What are the pros and cons of each?
- Which scenarios warrant a business license?
These questions are all reasonable and aim to be answered in this article. As you read along, you’ll become armed with business formation knowledge that will have you ahead of your competition and secure in your formation process.
With that said, let’s check out the differences between an LLC and a business license.
- A business license is a formal document that is filed with the government which permits businesses to partake in a variety of activities.
- There are several types of business licenses that can be obtained at the local, state, and federal levels.
- A limited liability company (LLC) is a type of business structure that provides a simple formation process, basic tax structure, and limited personal liability to owners.
- An LLC is a business structure, while a business license is a series of documents that allow businesses to engage in activities while remaining compliant with regulations.
- Both LLCs and business licenses can provide risks and benefits to your business formation process.
A business license is a formal document that is filed with the government which permits businesses to partake in a variety of activities.
The purpose of a business license is to ensure that businesses are complying with local, state, and federal laws pertaining to these activities.
Businesses that obtain licenses can benefit from tax benefits, brand preservation, permission to sell certain goods and affirm public safety.
Some of the permits that are granted by business licenses can include selling alcohol, selling cannabis products, certain retail sales, manufacturing, professional practices, and other heavily regulated activities.
It is wise to check with your state government to see if your business would benefit from obtaining a business license, especially if your business operation includes any of these activities.
Types of Business Licenses
There are several types of business licenses that can be obtained at the local, state, and federal levels.
Federal business license
Federal business licenses pertain to the entire government of the United States.
However, most of the licenses required by certain businesses are issued at the state and local level.
The only involvement that the federal government has in business formation is through obtaining an employer identification number (EIN) and allowing alcohol/tobacco sales.
State business license
State business licenses are the most comprehensive and vary among the states in terms of coverage and necessity.
Ultimately, state business licenses help businesses define the scope, or area of influence and operation, of their organization.
These licenses also often require renewal.
Local business license
Local business licenses vary based on the location of your business. These business licenses are usually required for all establishments, no matter the type.
One of the most important goals of a local business license is to ensure that businesses are complying with local zoning requirements.
Limited Liability Company (LLC)
A limited liability company (LLC) is a type of business structure that provides a simple formation process, basic tax structure, and limited personal liability to owners.
In fact, LLCs are the most popular business structure in the United States for small businesses.
The tax process of LLCs involves running the business taxes through the personal tax return, which avoids the double taxation problem seen in some corporations.
This tax method is known as pass-through taxation.
What’s the difference between a business license and LLC?
There is one major difference between a business license and an LLC.
An LLC is a business structure, while a business license is a series of documents that allow businesses to engage in activities while remaining compliant with regulations.
|A series of documents that permit businesses to engage in activities while adhering to local, state, and federal regulations
|A business structure that offers limited personal liability and the ability to open almost any business type
Pros & Cons
Both LLCs and business licenses can provide risks and benefits to your business formation process.
Here is a pro and con chart discussing what both offer:
Allows businesses to engage in many different activities
Complements most business structures
Complex filing process
Types and permissions differ by local, state, and federal laws
Limited liability protections
Simple tax program
Investors are less likely to invest
Reputation is not as solid as with corporations
Why form an LLC before getting a business license?
Forming an LLC before getting a business license is a strategic move. Firstly, LLCs are required to draft articles of organization, which can be a requirement for business licenses.
Next, The LLC title can give credibility to businesses, which may make obtaining a license a little bit easier.
Lastly, establishing a structure can identify the goals of a business – which should be completely ironed out before applying for business licenses.
Business License vs. LLC: Which option is best for you?
Congratulations! You’ve reached the end of this discussion on business licenses vs. LLCs.
These two business formalities are essential for successful business operations.
Business licenses will be needed for certain activities, permits, and legal occurrences.
However, you should establish your LLC prior to submitting business license documentation at the local, state, and federal levels.
Although we all wish that forming a business could be as simple as opening a lemonade stand, you’re well on your way to fully understanding all of the logistical moves that go into opening a business.
Good luck with your future business endeavors!