What is an LLC license? Understanding its importance for your business

Deciding what type of business legal structure to use is a key decision for starting a new small business. A limited liability company, or LLC, is a popular option thanks to its personal liability protections and advantageous tax structure.

If you’re considering starting an LLC, you’ll need the collection of paperwork known as an LLC license. We’ll explore what an LLC license is, how it’s different from a business license, and the basic steps for forming an LLC to help you get started registering your LLC small business.

Key takeaways

• Having the proper business license is necessary to legally run a business.
• An LLC is a type of business structure that provides liability protection and tax benefits.
• An LLC license is the collection of paperwork that proves you’re registered as an LLC.
• A business may require both a business license and an LLC license.

Table of contents

• Introduction to business licenses
• What is an LLC?
• What is an LLC license?
• Pros and cons of an LLC
• How to form an LLC
• Key differences between a business license and an LLC license
• Streamline your LLC business with FreshBooks

Introduction to business licenses

When you start a new business, it’s essential to get the proper licensing and paperwork so that you can legally conduct your business operations and remain compliant with local regulations. Governments require businesses to have a business license that is up to date and appropriate for their business structure. These licenses are issued at the local, state, and federal levels. 

The type of general business licenses you need depends on where your business is located, what operations you perform, and how you’ve structured your company. Having an outdated or incorrect business license or local licenses can result in fines and other potential penalties to a business.

What is an LLC?

A limited liability company, or LLC, is one of the most popular business structures for small businesses. This is because being an LLC allows the business to operate as a corporation at the state level, giving the business owner some legal separation from the company. This ‘limited liability’ means the business owner cannot personally be liable or go bankrupt as a result of the company’s activities, providing limited liability protection.

At the same time, LLC business owners can avoid some of the disadvantages of being a full corporation — primarily, the higher rates of corporate taxes. LLCs are still taxed like a partnership or sole proprietorship at the federal level. Profits from an LLC business are only taxed once, as personal income tax.

What is an LLC license?

An LLC license is not actually a formal business license — rather, it’s a collection of paperwork that proves you run a registered LLC business. This is necessary for things like opening a business bank account or establishing an operating agreement, which requires proof of a legally recognized business entity. The term ‘LLC license’ is unofficial and refers to a series of paperwork that often includes:

• Articles of organization: This is the legal document that establishes the LLC.
• Certificate of good standing: This is a state form that proves your business is valid and legal. Not all states offer this, and some may offer a similar document under a different name.

In most cases, the articles of organization will serve as an LLC license for most day-to-day operations, like opening a business bank account. Note that a ‘Doing Business As (DBA)’ form is not the same as articles of organization that register your business as an LLC, and will not likely be accepted as proof of your LLC.

Pros and cons of an LLC

It’s important to fully understand the benefits and drawbacks of an LLC when choosing the right business structure for your small business.

Pros of forming an LLC

LLCs have a number of pros, particularly when it comes to reducing liability risk and maximizing tax advantages compared to other business structures:

• Personal liability from business debts relating to the company
• Flexibility to choose between pass-through taxation and corporate taxation
• Pass-through taxation allows members to be taxed only once on their personal income taxes, rather than being taxed twice as a corporation
• More straightforward business administration compared to a corporation

Cons of forming an LLC

Any business structure comes with some cons. LLCs tend to be geared towards smaller businesses compared to corporations, so cons tend to be associated with self-employment and self-managed businesses:

• If members choose pass-through taxation, they must also pay self-employment taxes
• LLCs may have to be dissolved if a member becomes bankrupt or passes away, unlike corporations, which can exist in perpetuity

How to form an LLC

The default structure for a new business is a sole proprietorship, even if you haven’t officially registered as such. If you want to form an LLC, you’ll need to register with the appropriate department in your region. While the exact process varies by state and municipality, the following steps can guide your registration:

Step 1: Choose your business name

You may already have a name that you use for doing business. However, if you’re registering as an LLC, you’ll still need to check that this name is available for business use. Check your state’s business registry, as well as any trademarks and copyrights that might conflict with your chosen business name.

Step 2: File the articles of organization

Each state has slightly different articles of organization, so it’s a good idea to look through your state’s rules and regulations. This information is typically available from the Secretary of State’s office and can usually be found online.

Many small business owners choose to file articles of organization on their own, or you can look to a pro for legal support. Filing articles of organization may come with a filing fee that varies depending on where you live.

Step 3: Choose a registered agent

The registered agent is the entity (person or business) that will receive any legal notices related to your LLC. This agent needs an address that’s publicly available, so some small business owners choose to hire a professional or purchase a business mailbox if they don’t want to make their home address public.

An LLC can have one member or multiple members. You can choose any of these people to be the registered agent, or you can list someone who is not a member, and they can take on the registered agent role. It’s important to have a reliable registered agent because this entity is responsible for delivering any legal documents relevant to the business.

Step 4: Complete any remaining business documentation

Once you’ve completed the articles of organization required by the state, you’ll need to finish any other documentation required for running your business. This can include a variety of business licenses and permits specific to your business type and area.

You’ll also need an employer identification number, or EIN, so that you can properly file your business taxes and open a business bank account. You can register for an EIN using the IRS website. This process does not incur any filing fees.

Key differences between a business license and an LLC license

Although the names are similar, a business license and an LLC license serve two different purposes. In many cases, a small business owner may need both of these if they set up their company as a limited liability company.

Most business licenses are required for doing business legally in a given jurisdiction. There are many types of business licenses, and the type you need will depend on where you live and what type of business operations you perform.

An LLC license is not technically a license — it’s the collection of paperwork that shows you set up your legal business structure as a limited liability company. It’s not required for everyday business activities the way that a business license is required, but it is necessary for proving that your company is an LLC. This is especially important if you need liability protection in case of a lawsuit.

Streamline your LLC business with FreshBooks

Organizing your business as a limited liability company is a great option for small business owners seeking liability protection with an advantageous tax structure. An LLC license is an essential first step in forming your LLC and doing business. Once you’ve filed your articles of organization and registered your business with the state, it’s time to start growing your company. 

FreshBooks helps LLC business owners manage day-to-day business operations, streamline their accounting, and make everyday financial management easy. Expense tracking and categorization offer an efficient way to prepare your expenses for filing your taxes as an LLC, while automated invoicing and payments help you get paid more quickly. With FreshBooks, you can automatically generate financial reports for tax reporting, business strategy, and growth. Try FreshBooks free to discover how the right accounting software can help you grow your LLC today.

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