LLC Formation and Business Licenses: Separating Fact From Fiction

By Edward A. Haman, J.D.

LLC Formation and Business Licenses: Separating Fact From Fiction

By Edward A. Haman, J.D.

Many people get confused about the relationship between obtaining a business license and forming a limited liability company (LLC). To resolve this confusion, it is necessary to understand that business licensing and LLC formation are two separate things, serving separate purposes.

The purpose of a business license is to give you legal authority to conduct your business activities. The purpose of forming an LLC is to provide you with some degree of liability protection, and possibly to obtain some tax advantages.

Read on to learn about the differences between the two, and how they may relate to each other.

Do You Need a Business License to Form an LLC?

Many LLCs do not need to obtain a business license. If a business license is required, it will be required regardless of whether your business is structured as an LLC, a corporation, a partnership, or a sole proprietorship. Licensing is not related to how your company is structured, but to the type of business you engage in and the location where you operate.

Forming an LLC is controlled by state law. To form an LLC you will need to prepare certain documents, and file some documents with the appropriate state agency. Such documents typically include Articles of Organization and an Operating Agreement. These documents will not require you to provide any information about whether you have any business licenses.

For this reason, you don't need a business license to form an LLC. You may need to obtain some type of business license in order to legally operate your business, but that has no effect on your ability to create an LLC.

When Are Business Licenses Required?

Business licenses may be controlled by either state or local law. There are several types of licenses that fall under the general category of business license. These are generally governed by either state or local law. You will need to check with the appropriate state or local agencies where you will be conducting your business to find out what, if any, type of business license is required.

  • Occupational and professional licenses. If you engage in a certain profession or occupation, you may need a license. The list can seem endless, but examples include doctors, psychologists, lawyers, accountants, architects, engineers, funeral directors, massage therapists, barbers, and manicurists.
  • Industry licenses. If your business engages in a certain type of activity, a license may be required. Common examples include child daycare centers, assisted living facilities, hotels, fitness centers, and gun dealers. Similar to licenses, certain business activities may require permits, such as building permits for construction projects, home occupation permits for rental units, and health permits for food service.
  • Tax licenses. Your business may need to register with the IRS, as well as state and local tax agencies. This is not limited to income tax, but may also relate to collecting sales tax or other special taxes relating to such things as the sale of liquor, tobacco, or motor fuel.
  • Business registration licenses. Some municipalities require most, or all, businesses operating in their jurisdiction to obtain a license to conduct business. This is basically a tax that is levied on all businesses, usually justified by the claim that it somehow protects the public.

Such licenses are generally required regardless of whether your business is structured as a sole proprietorship, some form of partnership, a corporation, or an LLC.

Which Comes First?

In the case of a professional license, you will need to obtain that license before you can open your business. For example, you can't open a medical practice without first obtaining a license to practice medicine.

If you are starting a new business that does not require a professional license, your first step will be determining its structure. If you decide that an LLC is the best way to organize your business, you will usually set up your LLC and then apply for any business license that is required.

If you are already operating your business under a structure other than an LLC, you will probably already have any required business license. In this situation, you will be converting your business structure to an LLC, and will need to check with the licensing agency to find out how to transfer your business license to the LLC.

Regardless of the nature of your business, you will need to determine how to best structure the company, and investigate whether any type of business license or permit is required.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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