I am new to Limewire so this may be a dumb question but how do you know when you are downloading illegally? I have downloaded two tracks and each time a window informed me that no licence could be found and did I want to continue with the download? I didn't know what that meant but downloaded anyway. Were the downloads legal or not? How will I be notified when I don't have a free download? I would rather pay the price than pay a fine.

As a thumb rule; is it sold in a shop, then it most likely is protected by copyright laws. Smash hits, blockbusters, or the top of the bilboards fall definitely under this category.
However, copyright laws depend on the country you live in. Some allow you to download a song of which you've already legally bought the CD.
Other than that, just use your common sense. Just don't believe that with purchasing the LW P2P client you'll also have purchased the right to legally download copyright protected material. That's definitely not the case, besides when downloading LW you confirmed already not to do so (remember?).

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More about license settings here: License requirement (click on link)