Do I Need an LLC or a Business License?

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One of the first decisions you must make when you decide to go into business is the choice of a legal structure for your enterprise. Many small business owners opt for a limited liability company, or LLC. Other would-be entrepreneurs discover that they must obtain a business license from a municipality, state or the federal government. Depending on your location and the nature of your business, you may decide to form an LLC in addition to obtaining a business license.

Limited Liability Company

An LLC shields its members from personal liability without imposing the structure of a full-fledged corporation. LLCs are regulated by individual states and are not recognized as a legal structure for federal tax purpose. A business owner or partnership might choose to form an LLC to avoid the double taxation imposed on corporations and their stockholders by the IRS. Unlike a corporation, an LLC does not file income tax returns as an entity; instead, its revenue passes through the company to its individual members who pay individual income taxes that include self-employment tax.

Federally Licensed Businesses

Several categories of businesses require a federal license, especially if interstate commerce is involved. Businesses that deal with agricultural products, alcohol for consumption, aviation, firearms and weaponry, fish and wildlife, maritime transportation, mining or drilling, nuclear energy, broadcast communications, and transportation are regulated by various agencies of the federal government. Paperwork involved with registering with a federal agency is often complex and lengthy. Depending on the nature of your business, you may deal with more than one agency to obtain the proper registration and permits.

State-Licensed Businesses

Physicians, attorneys and other professionals must demonstrate a certified level of training, education or both to obtain licensing in the jurisdictions where they base their practices. Business operators in many categories, such as real estate agents, private investigators, auto mechanics and building contractors must obtain licensing from the Secretary of State's office. If your business conducts retail sales, you must obtain a permit from the state to collect sales tax from your customers. Many states require licensed businesses to obtain regular renewal for their licenses to remain valid.

Local Licenses and Permits

Businesses that do not require federal regulation or state licensing frequently require local permits to operate legally. If your business generates foot or automobile traffic, or if you store large amounts of inventory, you will likely need a permit. Food preparation establishments must obtain permits and undergo health department inspections. Even if you operate your business by telephone and your personal computer, you will likely need a "doing business as" or DBA certificate. This is especially true if you operate your business under a fictitious name or any name other than your legal name.

Read More: What Is an LLC License?