Do I Get a Business License or Delaware LLC First?
Is the first step applying for a business license or forming a Delaware LLC? Unlike the chicken or the egg, this question has a definitive answer – the LLC formation comes before the business license. In order to begin doing business under a business license, you must first have formed the applicant. The LLC should be started first. Then you should obtain your business license. Similarly, you should form the LLC before obtaining an Employer Identification Number (EIN) from the IRS.
Is an LLC a Business License?
The requirement for a business license depends on where you are conducting business and what type of business you are conducting. Generally states and municipalities have business licenses for all types of activities. Often you need both a state business license and a municipal license in the incorporated municipalities where you do business. However simply forming an LLC does not require a business license and is not itself a business license. Instead an LLC is a Limited Liability Company. While the letter “L” appears twice in LLC, neither of those letters stands for license.
Instead an LLC is sometimes referred to as an artificial entity or an unincorporated entity. While the LLC has a general purpose clause that it can conduct any type of business that is not illegal, the actual conduct of that business usually requires additional government licenses.
Most businesses, regardless of entity type or ownership structure, are required to obtain one or more business licenses to conduct operations within a state and municipal jurisdiction. Often business licenses are renewed annually. If you form a Delaware LLC, and do not operate in Delaware, the business license will not be required in Delaware. It will likely be required in the local areas where you operate your plumbing service, restaurant, and rental properties, etc.
Why Form a Delaware LLC First?
The LLC itself is the applicant that applies for a business license, even if the manager or member is doing the work. The business license gives the authority to conduct the specific business activities you perform in the name of LLC.
How to Form a Delaware LLC
If you are physically located in Delaware and want to start a business, you would start by filing an LLC Certificate of Formation with the Division of Corporations in Delaware. You then would visit onestop.delaware.gov to obtain your business license. You will be prompted to answer business-specific questions about your company (services vs. goods for example). Once you obtain your business license, you are ready to operate a business within the geographical confines of Delaware.
On the other hand, if you are like 99% of Delaware LLC members and conduct business outside of Delaware, you will not need a Delaware business license.
Follow these steps if you operate a Delaware LLC outside of Delaware:
Step 1: Form your Delaware LLC with the Delaware Division of Corporations and obtain a Tax ID Number from the IRS, also known as an Employer Identification Number (EIN);
Step 2: Qualify your business, if required, through the non-Delaware states’ foreign LLC qualification process (often called a Certificate of Authority) and open a bank account;
Step 3: Analyze each state and locality’s specific rules governing business license requirements (often found at the state, city, or county level). Follow the individual steps outlined by each agency to obtain your business-specific licensing. Please note that some industries will have additional licensing required outside of state, city, or county-specific licensing (such as professional licensing for a doctor or attorney). You should also evaluate your insurance needs and other business operational requirements.
Once you have your Delaware LLC and any necessary qualifications and licenses, you’re well on your way to having a compliant business.
