Navigating the various jargon you will come across when starting a business can be interesting, to say the least, but even some seasoned entrepreneurs mistakenly assume terms like “LLC” and “business license” are interchangeable.
So, to answer the question “Is an LLC the same as a business license,” the short answer is that no, a Limited Liability Company is different from a business license. Let’s get into why.
Let’s look at the specifics of the LLC and business license and answer some common questions.
What is a Limited Liability Company?
A Limited Liability Company (LLC) is a business structure that offers its owners limited liability protection while allowing them to take advantage of the benefits of a partnership. Unlike a sole proprietorship, the owners of an LLC are not held personally liable for the debts and liabilities of the business.
Related: What is an LLC?
What is a business license?
A business license is a document that allows a business to operate in a specific location. Licensing requirements vary from place to place but generally include filing an application and paying a fee. In some cases, businesses may also be required to submit to a background check or obtain liability insurance. Once issued, a business license typically needs to be renewed on a regular basis, typically annually.
More often than not, a business license is required by a local department, though a few states require a business to obtain licensing in order to operate legally.
Some types of businesses will also require a specific license, such as businesses selling firearms, alcoholic beverages, and others.
In addition to the business license, a small business will typically need to register for a few other types of licenses and permits, which may include:
- Sales tax permit – Most states require businesses selling taxable goods and/or services to obtain a sales tax permit (also referred to as a business tax certificate). A sales tax permit is a permit that allows a business to collect and remit sales tax.
- Occupational License – While not technically a business license, the occupational permit (also referred to as professional licensing) is a licensing required to perform certain types of services. A few common examples include accountants, contractors, locksmiths, and manicurists.
- Occupancy Permit – An occupancy permit is a specific license that allows a business to operate from a commercial location. In some municipalities, businesses operating out of personal residences will also need to register for a home occupation permit.
- Employer Identification Number (EIN) – An EIN, (also called a federal tax ID number), is a nine-digit number assigned by the Internal Revenue Service (IRS). It is used to identify businesses and other entities for tax purposes. Businesses use EINs to open bank accounts, file business taxes, and hire employees.
Related: Do I Need a Business License?
So, to sum up this question, the term business license refers to an authorization given by the government that allows a business to operate legally.
An LLC, or Limited Liability Company, is a legal entity that offers protection for the owner’s personal assets should the business face legal action.
A business will always need a legal entity (also referred to as a business structure). The four main types of legal entities include a sole proprietorship, general partnership, corporation, and LLC. In addition to the legal entity, most businesses will also obtain a business license.
It’s important to research the requirements for your specific type of business before beginning.
FAQs
Which do I get first, a business license or LLC?
The formation of a Limited Liability Company is typically recommended before a business license because the name of the LLC will be registered, and it must be unique. If a business license is obtained before the LLC and the name you want isn’t available, the business license will need to be changed.
How do I form an LLC?
An LLC is formed by filing articles of organization with the Secretary of State (or similarly named state agency that oversees the formation of a business entity) in the state where the LLC will operate.
Related: How to form an LLC in each state
What’s the difference between a business license and a seller’s permit?
A business license is an authority given by a governmental entity that allows a business to operate legally, while a seller’s permit allows a business to collect sales tax from the sale of taxable products and services.
Depending on the business, both will probably be needed.
Can you have an LLC without a business license?
While it’s rare, a business may operate without some business license or registration. The type of business entity (sole proprietorship, partnership, corporation, or LLC) isn’t relevant if a business license is required. The need for a business license is primarily based on the business is location and what it sells.
Is a business license the same as a DBA?
A DBA, or Doing Business As, differs from a business license.
Each state is different, but most sole proprietorships and partnerships will need a DBA as they will operate under a specific business name rather than the owner’s full first and last name. Similar names include DBA, Assumed Name, Trade Name, or Fictitious Name.
Related: How to register for a DBA
What can happen if you operate a business without a license?
Operating a business without a license can lead to many serious repercussions, such as:
– Non-compliance penalties, liens, and interest.
– Business operations could be suspended until proper licensing is obtained, and persistent failure to comply with these requirements may even result in the shutdown of your business.
– There is also a risk of legal action or lawsuits.
– Lack of compliance can damage the business owner or business’s reputation, potentially deterring clients or customers.
– Not securing or renewing a business license can lead to hefty fines, making it an expensive oversight.