LLC License | What It Is & How To Get One?
A limited liability company must fulfill certain requirements before it can be fully established and operational. An LLC may be required to obtain a license based on the business and location of the company.
Depending on the state laws your LLC is under, licenses may be needed at the federal, state, county, or city levels.
As a business consultant for limited liability companies, I gained over a decade of experience helping clients with forming their LLCs and obtain an LLC license to ensure the entity complies with state laws.
After in-depth research and collaboration with our panel of legal experts, I'll provide all pertinent details regarding an LLC license.
Quick Summary
- An LLC license is essential for legally operating a limited liability company, requiring compliance with federal, state, and local regulations.
- The process for obtaining an LLC license involves compiling necessary documents, filing an application, and adhering to specific industry and location-based licensing requirements.
- Statistics reveal that 18% of small businesses fail in their first year, with the number rising to 50% by the fifth year and 65% by the tenth, highlighting the importance of proper planning and compliance for longevity.
- In my opinion, the complexity of obtaining an LLC license underscores the importance of thorough preparation and the value of professional guidance.
What is an LLC License?
An LLC license is the unofficial term used when mentioning the paperwork that has been used in the formation of a limited liability company.
Companies use LLC licenses as proof that they are running a registered limited liability company in a particular state.
Why Do LLCs Need Business Licenses?
LLCs need business licenses to legally operate in the state where they are registered.
This means that if an LLC wants to form in New York, it needs to have a company license from the state government.
In 2023, according to the Commerce Institute, an unprecedented number of businesses were initiated, totaling nearly 5.5 million, marking the highest record and underscoring the growing need for proper licensing and legal compliance for new LLCs [1].
In addition, every other location requires local permits and licenses for businesses as well.
A business license is essential if your limited liability company wants to provide clients with professional services, such as accounting or law.
If you form an LLC without a business license and provide services like these, the local government will likely shut down the company and fine its owners.
Your business may be protected from liability thanks to an LLC status, but this protection does not apply outside your state.
Also, if you form an LLC in one state but provide services to customers in another, they will still require a business license from the second state even though the company has already been formed.
This is just one reason why it's important to seek legal advice so that an LLC lawyer can help clients form their companies correctly and include all the required legal documents.
What Types of LLC Licenses Are There?
The types of LLC licenses available are federal, state, and local.
LLC license types vary depending on what kind of business plan clients have.
For example, there could be a single-member LLC or a multi-member LLC, which means different things regarding tax reporting requirements and who is responsible for business debts and other business expenses.
1. Federal Licenses
Despite liability protection, it is often necessary to obtain certain federal licenses to conduct some types of businesses; industries that govern nuclear technology, alcoholic beverages, telecommunications, and transportation are examples of industries requiring a federal license.
The most common types of Federal Licenses include those from the US Department of Transportation, the Nuclear Regulatory Commission, and the Alcohol & Tobacco Tax Trade Bureau.
In addition, there are specific industry-related certifications required for a professional LLC, such as those required by healthcare providers, real estate brokerages, or auto dealerships.
From our experience, an LLC that plans to hire employees will also have to obtain the Federal Employer Identification Number, a form, or a license, helping LLCs pay taxes on their employees or reap other tax benefits.
However, there are situations where things can get complicated due to overwhelming amounts of paperwork and legal matters. Therefore, good advice here would be to seek legal counsel (a law firm or accountant) about the federal licenses your limited liability company might need.
In case your LLC needs a federal license, it's best to contact the Small Business Administration (SBA) and inquire about the details [2].
2. State Licenses
State business licenses are required for any business entity that operates or intends to operate in a given state as any of the following: private investigators, real estate or legal agencies, or physicians.
For businesses with employees, the need for obtaining an LLC license is usually straightforward. Most states require all employers to apply for liability insurance, which will be effective only after receiving proper licensing from the State Insurance Commissioner.
Applicants must submit all necessary paperwork and fees to obtain an LLC license along with their state tax ID number (if they have one), which is usually applied after obtaining a federal EIN (Employer Identification Number).
This process may take up to two weeks, but it can be done online in most cases.
3. Local Licenses
Location requires local permits and licenses for businesses as well. Many people don't realize this fact until they want to form their own LLCs.
If you form your limited liability company without a business license and provide services like these, you'll likely be fined or, even worse, risk losing your limited liability status.
From our research, to obtain business licenses, you need to start by finding out what kind of business license is required in your area and whether or not there are any special requirements for obtaining this business license.
You can always consult with local business authorities since they should be able to provide you with all the necessary information regarding business licenses, depending on where your business is located.
LLC License Application
The filing fee and requirements for your license will depend on the state in which you're starting your limited liability company.
The application process itself generally includes filling out an application form, paying required LLC fees, and taking care of other formalities such as publishing plans or posting notices that will aid members' asset protection if they are ever sued.
In most cases, after submitting applications along with necessary legal documents and payments at the appropriate agency office, applicants will receive their licenses within a few days.
Depending on your chosen industry and business structure, you will have to obtain a license with a corresponding agency.
For example, to operate as an insurance agency, you will need to get a license from the State Insurance Department.
Although you must apply for corresponding licenses with the appropriate agencies, most states do not separately require them anymore. Each state has its own rules regarding what businesses are subject to licensing requirements.
Also, depending on where your company's offices are located (in particular, whether they're inside city limits), there may be additional local licensing procedures to follow after obtaining initial permission from the state.
The Steps for LLC License Application
In most cases, you will have to follow the next steps to obtain your license.
1. Compile the LLC Documents
Once you've established what kind of licenses your limited liability company needs, you need to prove that your new LLC business entity is authorized to do business in your state.
For this, you will need the LLC articles of organization—a document that establishes your LLC's name and purpose, as well as its registered agent.
The LLC operating agreement and any resolutions made by the LLC members will establish how your limited liability company will be governed and who has the authority to make decisions about it.
Once you have compiled all the LLC formation documents, they need to be filed with the Secretary of State of the state where you plan on setting up.
2. File Your Application
When you've determined what business license to apply for and which business papers are required, the next step is to fill out and submit an application.
Each application is unique, so adhere to the directions carefully.
Application procedures vary from state to state, so some states accept filings made online or by mail, while others may even allow in-person or fax submissions.
In some instances, when a limited liability company has more than one owner, all owners must sign these papers or have them notarized.
3. Wait for the License Approval
The waiting period varies from agency to agency. You must fill out your application properly and submit the remaining documents so it can be approved.
You will either receive immediate approval or be notified when the licensing authority has evaluated your application.
Because several industries restrict the number of licenses that can be issued within a particular city or state, your license could easily be put on hold until further notice.
Planning this step is extremely important, so make sure to research this matter well in advance.
4. Stay Compliant
You will obtain legal authorization to operate your business structure once you are qualified and receive your license.
However, many commercial LLC licenses must be renewed on an annual basis, so keep track of any renewal demands to ensure that your license does not expire inadvertently and your limited liability company remains in good standing with the state.
Common Pitfalls When Obtaining an LLC License
Here are some common mistakes made during the LLC formation process and strategies to avoid them:
- Choosing the wrong business name: One of the first steps in forming an LLC is selecting a business name. This step can be more complex than it appears, as the name must comply with state regulations and not infringe on existing trademarks.
- Ignoring state-specific requirements: LLC formation rules vary significantly from state to state, including differences in paperwork, fees, and ongoing compliance requirements Carefully review the specific requirements for LLC formation in your state. This information is typically available on the Secretary of State's website.
- Overlooking the importance of an operating agreement: While not all states require an operating agreement to form an LLC, failing to create one can lead to internal conflicts and issues with how the business is run, especially in multi-member LLCs.
- Neglecting necessary licenses and permits: Simply forming an LLC does not mean you have all the necessary permissions to operate your business legally. Depending on your business type and location, additional licenses and permits may be required. Moreover, it's crucial to be aware of the challenges small businesses face. As per the Bureau of Labor Statistics, approximately 18% of small enterprises collapse within the first year, half falter by the fifth year, and around 65% cease operations by the tenth year [3]. Ensuring legal compliance, including obtaining the right licenses, is a step towards avoiding such pitfalls.
"Failing to accurately complete the necessary forms and adhere to business operating requirements may result in losing your LLC's liability protection, potentially subjecting you to personal liability in case of a business-related lawsuit."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
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FAQs
How Much Does an LLC License Cost?
An LLC license costs between $50 and a few hundred dollars. Its cost varies depending on the city or state that the business entity is located in.
What Comes First, LLC or Business License?
The LLC comes first before the business license can be applied for. You’ll first need to form an LLC, which involves filing your Articles of Organization and LLC Operating Agreement, before getting one.
How Often Do I Have to Renew My LLC License?
You have to renew your LLC license annually. The frequency may vary depending on the laws of the state that the business structure is located in. Regulatory agencies will usually send a notice well in advance before the license expires.
What Is a DBA License for LLC?
A DBA license for an LLC is a document that allows the use of a fictitious business name. Not every state requires a DBA license.
Do All LLC Members Need to Be Licensed?
Not all LLC members need to be licensed, but if you are running a professional LLC, some states require that all owners (members) be licensed.
Does a Foreign LLC Need a Business License?
A foreign LLC needs a business license to operate legally in the state they is located in.
Is Renewing an LLC License the Same as Filing an Annual Report?
Renewing an LLC license is not the same as filing an annual report. Renewals are filed with the corresponding licensing agency, while annual reports are filed with the Secretary of State.
References:
- https://www.commerceinstitute.com/new-businesses-started-every-year/
- https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits
- https://www.bls.gov/bdm/us_age_naics_00_table7.txt
