Choosing to run your business as an LLC, short for limited liability company, can have a big impact on taxes and your pay as an owner. Many entrepreneurs find the LLC structure appealing, especially since it can help them save thousands of dollars per year on taxes.
Once you've decided to form an LLC, there are a few state-specific steps you'll need to follow in order to make it official. An LLC license is a term for the paperwork you get when creating an LLC.
Here's a closer look at what an LLC is, how to form an LLC, and what someone likely means when talking about an LLC license.
An LLC license is an unofficial term used to describe the paperwork creating a limited liability company. There is no actual license required to form an LLC, and an LLC doesn't give you a license to operate a business. Instead, an "LLC license" is evidence that you run a company that's registered as an LLC with your state.
The legal document that establishes an LLC is called articles of organization. Once this form is filed with your state, along with any other required documents and filing fees, your LLC is an active business. You can use those articles of organization as a de facto LLC license. Plan on handing over a copy of this document if you want to open a business bank account.
If your state offers a certificate of good standing or similar document, you may also use that to prove your business is legal and valid. If you have questions about LLC license and registration rules where you live, head to your state's Secretary of State website for the details.
Tip: DBA is short for "doing business as." A DBA registration is not the same as an LLC registration. In fact, your LLC can file a "doing business as" name in addition to the official LLC name.
By default, a business is considered a sole proprietorship even if you don't register with your state. But there are some benefits, including liability protection and tax advantages, to choosing the LLC business structure. If your business is a considerable legal risk (this means any business that handles other people's money or offers a service with a risk of client injury), or makes enough money to cover your full-time income, it may be worth considering creating an LLC.
The process of forming an LLC is slightly different in every state, but you can follow some common steps when creating an official limited liability company.
You will start by choosing a business name, which you should ensure is not already taken in your state's business registry. For example, if your business is in California, you would use California's Name Reservations search. It's also a good idea to check for trademarks and copyrights that could prevent you from using the company name.
Next, you file articles of organization or similar forms with your Secretary of State's office. You can do this yourself online or look to an expert to handle this for you. Before spending hundreds or thousands of dollars on a lawyer, look through the process to decide if you can take care of it on your own or would benefit from the assistance of a legal professional.
Every state law has different rules and regulations around business entities, including LLCs. If you own an LLC, you are considered a "member" of the LLC. You can operate as a single-member LLC or a multi-member LLC with partners. The ownership of your business is clearly explained in your articles of organization.
An important decision to make when creating a limited liability company is choosing a registered agent. A registered agent is a person or business listed as the recipient of legal notices for your business. Because your registered agent requires a publicly available address, you may want to hire a professional instead of acting as your own registered agent.
A registered agent's most important role is called service of process—they're officially responsible for delivering legal documents that inform you of a pending lawsuit. Depending on the state, you may choose to act as your own registered agent to save money, but again that makes your personal information publically available.
Once registered with the state, it's time to focus on the documents required to run the business. These may include an LLC operating agreement and any required licenses or permits. If you have any doubts or questions, it's best to look to a legal professional who can guide you through the process.
Along the way, you should also sign up for an Employer Identification Number, an ID used for tax purposes. You can get an EIN from the IRS website. There is no filing fee required for an EIN.
Businesses don't have to create a new legal entity in every state. Instead, you can use your LLC from another state as a foreign LLC, the technical term for an out-of-state business entity.
Fact: If you don't complete the forms correctly and follow business operating requirements, you could lose the liability protection of an LLC. That could open you up to personal liability in the event of a business lawsuit.
We've established that there is no actual LLC license needed to run a business, but many specific types of businesses require another type of business license.
Here are some common businesses that would likely require a business license to operate legally:
Note: this is not an exhaustive list. Many other businesses could be required to get a license or permit after registering as an LLC.
Contact your local government or a business licensing expert for more information if you're having trouble navigating the requirements for your company.
How Accracy can help
As America's largest professional bookkeeping service for small businesses, Bench's team of in-house bookkeeping and tax professionals have unique insights into the financial benefits and drawbacks of operating a small business as a sole proprietorship, LLC, S corporation, C corporation, or other business structure.
If you're looking for advice or want to make a change to your business structure, start by downloading our free business entity guide. Curated by our team of experts, you'll get a detailed overview of the pros and cons of each structure.
So, what is an LLC license? There is no such thing as an LLC license! However, an LLC is a common business structure popular with small business owners for a long list of good reasons. You may need additional licenses or permits to run an LLC, but there is no specific LLC license requirement to create your business.
There's no shame in bringing in expert help if you're unsure how to form an LLC or if it makes sense for your business. When working with a team that includes trusted financial experts from Bench, you're making good decisions to help your business grow and prosper far into the future.
Further reading:
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