Sole proprietors and LLCs: Do you need a business license?

An entrepreneur is often bombarded with decisions to get a new business up and running. One of those myriad decisions is usually what form of business entity to establish: Operate as a sole proprietor, a limited liability company (LLC), an S corporation, or a standard corporation. Individuals venturing out on their own often debate between beginning as a sole proprietor or an LLC.

Both sole proprietorships and LLCs carry advantages, but the requirements and regulations differ, and each comes with different tax implications. Whether you need a business license largely depends on your location and business activities. Let’s dive a little deeper to explain.

Sole proprietorship is often the simplest form of business entity for individual business owners — fewer legal restrictions, less paperwork, and no separation of profits or tax filings. You also don’t have to register with the state unless you operate the business under a different name. But that lack of distinction between what’s personal and what’s business also carries unlimited personal liability —business losses, taxes, legal issues, reputation, etc., are all tangled up with personal identity.

Whether you need a business license as a sole proprietor can be a gray area. Business license requirements are a highly location-specific directive that can also be impacted by your industry or business activities. Check with your local authorities — state, county, city — to know for certain.

For example, if you’re a freelance designer, you’re technically a sole proprietor, and some states don’t obligate licenses for those professionals. But then you have cities such as Alameda, California, that make it clear: “All individuals, partnerships, corporations, and sole proprietors conducting business in the City of Alameda are required to have a business license. This includes persons dealing with residential and commercial real estate rentals or who operate home-based businesses in the city.”

Sole proprietors in a marketplace

Marketplaces such as eBay generally don’t require sellers to hold business licenses. You may not need a license if you simply plan to sell products online occasionally, but if you’re planning to grow your side gig into a business, you likely will. Again, check with your local authorities to be sure. Many local municipalities require online sellers or at-home businesses to carry a license or other permits.

An LLC doesn’t restrict the number of members, and most states allow for single-member LLCs. But whether comprised of a single member or multiple members, the LLC must operate under a business name, not an individual's name, and states generally require “Limited Liability Company” or “LLC” to be included in the registered name (e.g., “Fancy Flower Shop, LLC”). Operating as the sole member of an LLC is not the same as operating as a sole proprietor but does bear some similarities. 

As an LLC, you can operate as self-employed and not pay corporate sales tax but pay self-employment tax instead. Or you may choose to be taxed as a corporation. In either case, an LLC protects your personal assets and reputation from your company’s liabilities and debts, which is not the case when operating as a sole proprietor.

Unlike sole proprietorships, LLCs typically need to register with the state of formation. If you intend to operate in other states (i.e., “foreign” states) as well, you must qualify to do business as a foreign LLC in those states. This generally entails obtaining a Certificate of Status (aka, Certificate of Good Standing) from your home state so you can obtain a Certificate of Authority (aka, Application for Authority, or Foreign LLC Registration) in the other state. You’ll also need to pay associated LLC filing and reporting fees. For an idea of what that can cost, check out the New York Department of State’s page on foreign (non-New York) LLCs. 

Business license requirements, again, come down to location and business activities.

Before deciding which form of business you’ll operate, do your research to discover the distinctive requirements and regulations for each. You may find one is more appropriate for you than the other. Once you’ve decided your business type, research state and local governments’ business license requirements. Every state, county, and city is unique. Depending on your business activity, you may also need a federal license.

Sole proprietorship or LLC, it’s important to keep in mind that business activities and transactions affect licensing requirements. Even if your LLC itself doesn’t need a business license, you’re still going to need a food handler license to prepare food, a liquor license for alcohol sales, or a cosmetology license for a barbershop, etc. Business activity licenses are generally location specific: A cosmetology license for Kingston, Washington, likely won’t cover a stylist working in nearby Poulsbo, Washington.

To dive deeper into business license information and get assistance for your licensing needs, visit Avalara.