When you start your own business, a crucial decision is which business entity to choose, such as limited liability company (LLC) or partnership. You will likely also need a business license. But these are two very different things, even though plenty of entrepreneurs confuse their business license with their business entity.
An LLC is a business structure, and a choice, while a business license is usually a requirement.
Business Licenses vs LLCs
Forming an LLC provides clear advantages over a sole proprietorship or partnership, notably ensuring that the business owner’s assets are protected from liability, as the name suggests. At the same time, there are also merits to obtaining a business license. In fact, some businesses cannot legally function without a license.
LLCs operate in accordance with local laws, and business owners who obtain a license are permitted to sell certain products. A company with a business license in Texas, for instance, is authorized to conduct operations in that state.
The process necessary to obtain a business license might include additional requirements that must be satisfied prior to selling products or services. For example, the owner of a gun shop will need a specific business license to sell such dangerous weapons in accordance with the law. Furthermore, certain businesses require both a state and federal license.
The rules pertaining to state licenses differ from one state to the next so be sure to take a close look at the rules applicable to companies in your specific state. You could also check this SBA guide for your state’s requirements, or visit MyCorporation’s Business License Compliance page.
Business License Requirements for Home-Based Businesses
A growing number of entrepreneurs are launching businesses out of their homes. Keep in mind, a home-based business is not guaranteed to be exempt from the requirement for a license. The specific services or products you sell might mandate the use of a business license.
A business permit might also be necessary to conduct operations in full compliance with state and federal laws. Businesses permits have highly nuanced requirements compared to those of business licenses. Perform your due diligence, remain compliant with the requirements necessary to obtain your business permit and you will be able to move forward with your enterprise in full confidence.
An Inside Look at LLCs
In contrast to a business license, an LLC is a business structure that establishes the business as a separate legal entity from the owner. The business has its own specific assets, debt obligations, legal protections and other idiosyncratic features that are distinct from those of the individual who owns the company.
Opt for an LLC and you will receive the benefits of pass-through taxation (income passes through the business and is taxed at owners’ personal tax rates) shared with sole proprietorships and partnerships, in addition to the advantages provided to corporations. LLCs provide superior management flexibility and also safeguard the business owner’s assets against lawsuits and debt.
LLCs and Business Licenses Are Not Mutually Exclusive
Above all, business licenses and LLCs are completely independent from one another. Establishing your business as an LLC does not eliminate the possible need to obtain a business license. Similarly, obtaining a business license does not mean you cannot structure your business as an LLC.
It’s quite possible your business will function best as an LLC with a business license. Maintain an open mind, review the requirements for conducting business in your jurisdiction and industry and take every step to fully comply with the law.
Pros and Cons of LLCs and Business Licenses
In summary, LLCs and business licenses are not one in the same. Rather, business licenses are best described as documents issued by local, state and federal bodies to ensure lawful business operations. For the most part, you have no decision about obtaining a business license — you’ll need it to run your business.
Becoming an LLC, on the other hand, is a choice a business makes, one option among several business entity types. An LLC is a structure that mitigates legal liability and taxation burdens. You do not have to start an LLC to operate your business. You could instead start a corporation, a sole proprietorship, or a non-profit.
Your decision to structure your business as an LLC or obtain a business license will have legal and tax ramifications moving forward. If you are unsure as to whether the LLC structure is best for your business, consult with a business attorney for guidance.