<p>I was looking into the best encryption for a license key for an application, and someone said that someone can easily decompile the application and then just skip the test for the license key.</p>

<p>how would someone go about doing that practically speaking?  So they have my .dll, they have to decompile it somehow, then comment out the function call to check the license, then recompile it?  The decompiler has to be really good such that the code still compiles!</p>

Try opening your application with
Reflector
. You will probably be surprised :-)
And once a cracker has located the right location in your code, they can use a combination of
ildasm
/
ilasm
to remove the check from your application - even if the code Reflector generates won't compile.