LLC vs. Business License: What’s the Difference?

When starting a business, one of your first big decisions is which type of business entity to form. For example, consider a limited liability company (LLC), a popular startup entity due to its many benefits. 

You might have also heard of business licenses and wonder whether that might serve the same purpose as the LLC label. A business license is commonly confused with a business entity, but these are two different things. 

Lucky for you, this guide lays out the key differences between an LLC and a business license. 

What Is An LLC?

An LLC is a popular business structure that establishes the separation of the business from its owner. The LLC’s assets and debt are not directly linked to the business owner. Likewise, the owner’s assets are protected from risk if the business faces legal or financial troubles.  

Startup companies often elect this business structure due to its many advantages. For instance, in addition to personal liability protection, an LLC also offers flexibility in management, as there are few requirements regarding organizational structure. 

LLCs are also classified as  “pass-through” entities, meaning that the LLC is not taxed. Instead, income passes through the company to the LLC owners or members, who report it on their tax returns. LLCs can also choose to be taxed as a corporation instead by filing the appropriate form with the IRS. 

How Does A Business License Relate to An LLC?

Since an LLC is a chosen business structure that operates within the law, a business license can be considered a legal tool enabling business operations. Most LLCs require at least one business license to function legally. 

An LLC with a business license in New York is authorized to do business in the entire state. However, depending on the nature of your LLC’s business, you may need a state business license, a federal business license, and various permits.  

Some business licenses enable business owners to legally engage in certain business activities, such as selling food products or alcohol. For example, a wine shop or food truck owner needs a specific license to sell their goods. The owner must first acquire a tobacco sales license if an LLC wants cigars. 

The legal requirements and regulations for business licenses depend on various factors, so you must take the time to review your LLC’s purpose and business goals. 

License laws vary from state to state, and some areas within states have additional license requirements designated only to specific localities within a state. Be sure to review the local, state, and federal requirements. 

To Sum Up: LLCs and Business Licenses Are Not Synonymous

To put it simply, an LLC is a type of business structure that is a choice. You can easily choose a different entity type for your business, such as a partnership or corporation. A business license is necessary to conduct business activities and ensures legally compliant operations. 

These are two very different things, which means your LLC will not eliminate any need for a business license because your state has approved its formation. So if you’re set on forming an LLC, a key step will be determining which business licenses your LLC needs. 

Visit your state’s website and carefully review LLC regulations and operation requirements. Then, if you need more help, don’t be afraid to reach out to the state agency responsible for issuing the business license you need to run your LLC.