At the most basic level, a limited draw license or tag is one for which you must submit your name into a lottery to be drawn to receive one. Only so many licenses are allotted for a specified season/timeframe in a specified area. Simply, if your name is drawn while licenses remain, then you'll receive one.
However, it's seldom that simple any more. With computers actually doing the drawing, there are always options and add-ons. Among them are first, second, and sometimes third choice options for either location or season dates. So if your name is pulled but your first choice option is full, it reverts to second choice, and so on.
Nearly all lottery drawings now also include "preference points." For each year you apply for a specific license, but are unsuccessful in the drawing, you earn a point. The computer considers these points when doing the drawing and increases your odds for the highest preference point applications. It's important to note, that for some extremely limited hunts it takes many preference points to even have a hope of drawing a tag. Most states also offer inexpensive options to build up points without actually entering the lottery – you basically buy a point each season and collect them until you have enough to be competitive and know that you can fit that once-in-a-lifetime hunt into your schedule should you be drawn.
Most applications for limited draw licenses also allow you to apply as a group. You and your friends who wish to hunt together file a group application. That way you'll either all get drawn or none of you will get drawn. Preference is usually based on the member of the group who has the lowest number of points for that specific hunt.
Which hunts require drawing a license and the fine points of how the lottery system operates varies from state to state and province to province. Some are simple, and some are extremely complex. The best advice to navigate what sometimes feels like a maze is to work closely with your trusted outfitter. He or she will have a good understanding of how the system works for his or her hunting territory. After all, it's in the outfitter's best interest to have has many of his or her potential clients be successful in the drawings!
Outfitters may also know about guaranteed license options for their hunting areas. Usually, these are tags allocated to or via the outfitters to sell to their clients. Note, however, that these licenses are often significantly more expensive than tags issued in a general lottery. Sometimes the outfitters can set the price for these tags, but it's usually mandated by the issuing authority.
Limited draw licenses are a bit of a headache both for hunters and for outfitters. You can't count on making the hunt in any given season, and outfitters sometimes find themselves with too few potential clients having drawn or too many having drawn. However, they are in important tool in game management and in creating opportunity to hunt species and locations that simply can't bear the pressure resulting from unlimited numbers of hunters.
There are also services available who will manage your applications for you. You tell them what you want to hunt, where and when. Then for a fee, they make the proper applications for you. While this adds some expense, it provides you the assurance that complex applications are being made properly and that someone is working on your behalf to maximize your chances of winning a coveted tag.