Business License vs. LLC: A Quick Guide for Small Businesses

When starting a small business, one of the most important decisions you need to make is how to structure your business legally. One of the most popular ways is forming a Limited Liability Company (LLC). In some cases, you are required to secure a business license to operate. 

Business Licenses

A business license is a legal authorization that allows an individual or entity to operate a specific type of business within a particular jurisdiction. It serves as a regulatory mechanism, ensuring businesses adhere to local laws, regulations, and zoning ordinances. 

The requirements for obtaining a business license vary widely depending on the location and the nature of the business. Generally, the process involves submitting an application, paying a fee, and potentially undergoing inspections.

Business licenses are typically associated with sole proprietorships or partnerships and are common for small businesses that provide services or sell goods directly to consumers. 

Why They Matter

• Regulatory Compliance: As mentioned earlier, obtaining a business license ensures that you operate within your jurisdiction’s legal framework. That way, you can maintain order and fairness in the business landscape.
• Consumer Protection: Business licenses often require businesses to meet certain standards, such as health and safety regulations. This helps protect consumers and maintains the reputation of the local business environment.
• Zoning Compliance: Local governments use business licenses to ensure that businesses operate in appropriate areas designated for their type of activity. This prevents conflicts between businesses and residential areas.
• Revenue Generation: Business licenses usually involve a fee contributing to local government revenue. This revenue can be used to fund public services and infrastructure projects.
• Credibility: Displaying a valid business license can build trust with customers, partners, and investors. This demonstrates that your business is operating legally and responsibly.

How to Obtain One

Step 1: Determine Your Business Type and Location

The license you need depends on your business activities, industry, and location. Research federal, state, and local regulations to identify the specific licenses relevant to your business. You might also consider consulting a business formation expert to help you understand them. 

Step 2: Research Local Regulations

Different cities, counties, and states have varying licensing requirements. Visit your local city or county government’s website or contact their business licensing department to gather information about the licenses needed for your area. Local government websites often provide detailed guides and resources to assist you in understanding the requirements.

Step 3: Choose a Business Structure

Decide on the legal structure of your business. Whether you’re operating as a sole proprietor, partnership, or corporation, the type of license you need may vary. Your chosen structure will also affect your liability, taxes, and reporting requirements.

Step 4: Obtain an Employer Identification Number (EIN)

An EIN, also known as a federal tax ID number, is necessary for tax purposes and is often required when applying for a business license. You can obtain an EIN from the Internal Revenue Service (IRS) or hire a professional to do all the paperwork on your behalf.

Step 5: Pay the Required Fees

Most business licenses come with associated fees that contribute to the cost of reviewing applications, conducting inspections, and enforcing regulations. Fee amounts vary based on factors like business type, location, and the number of employees. Make sure to budget for these costs and submit the required fees along with your application.

LLCs

An LLC is a business structure that blends elements of a corporation and a partnership. It provides personal liability protection to its owners or “members” while maintaining a flexible operational structure. 

The primary purpose of forming an LLC is to establish a barrier between business liabilities and the personal assets of its members. This means the personal assets of the members are generally protected from the company’s debts and legal obligations. 

Additionally, an LLC offers flexibility in terms of management and taxation. Members can manage the LLC themselves or appoint managers to oversee operations. 

Key Features

Limited Liability Protection

If the LLC faces financial difficulties or legal action, the personal assets of the members, such as their properties and savings, are typically not at risk. This protection is similar to what is afforded to shareholders of a corporation.

Flexibility in Management

Entrepreneurs can choose between two management structures: member-managed and manager-managed. In a member-managed LLC, all members participate in decision-making and daily operations. Conversely, a manager-managed LLC involves appointing individuals to manage company affairs, while non-manager members have a more passive role. 

Pass-Through Taxation

Unlike corporations, where income is taxed at both the corporate and individual levels, an LLC’s profits and losses “pass through” the personal tax returns of the members. This eliminates the issue of double taxation and simplifies the tax reporting process. 

Members will then report their share of the company income on their individual tax forms, potentially leading to lower overall tax liability.

Ownership Flexibility

LLCs are allowed to have a single member or multiple members, while membership interests can often be transferred or sold without disrupting company operations. This can be particularly advantageous for businesses with changing ownership structures, succession plans, or those seeking to attract new investors.

Limited Formalities

An LLC would make the most sense for businesses that prefer a more streamlined approach to compliance. While corporations are subject to stringent record-keeping, annual meetings, and complex reporting requirements, LLCs have fewer mandatory administrative obligations. 

Business License or LLC: Which Should Come First?

Factors to Consider

Nature of Business

If your business involves activities that require a license to operate legally—such as selling alcohol, providing professional services, or running a food establishment—a business license would make more sense first. Certain businesses might be required to obtain licenses or permits before officially forming an LLC.

Liability Protection

Since LLCs provide limited liability protection, your personal assets are shielded from the debts and legal obligations of the company. If protecting your personal assets from business liabilities is a top priority, forming an LLC should be a primary consideration. This protection can be especially valuable if your business carries inherent risks or is susceptible to legal disputes.

Long-Term Goals

Forming an LLC early on might be more beneficial when you envision growth, expansion, or the addition of partners or investors. Such a business structure provides a formal and scalable business structure that can accommodate changes in ownership and attract investment.

Tax Implications

An LLC’s pass-through taxation structure allows you to prioritize simplified tax reporting and prevent double taxation. However, if your primary concern is local compliance and licensing, obtaining a business license could be the immediate focus.

Location and Regulations

The location of your business matters. Some jurisdictions might have specific regulations that dictate whether you need a business license before forming an LLC or vice versa. Look up the requirements in your area to ensure you’re following the proper sequence.

Deciding Between an LLC and Business License

The choice between putting up an LLC or obtaining a business license will depend on the nature of your business, your long-term goals, liability concerns, and regulatory requirements. 

In the case of Nevada, a business license is a must to operate legally within the state.

If protection, flexibility, and credibility are paramount, forming an LLC could be the right path. On the other hand, securing a business license might be the initial step when starting small and wanting to ensure legal compliance quickly.

Let Us Help You Decide!

With the guidance of NCH’s business formation experts, you can confidently decide between forming an LLC or getting a business license. By understanding your needs and aspirations, we can help you lay the foundation for a prosperous and legally protected venture. 

Call 1-800-508-1729 to schedule your free consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.