In summary: Whoever utters this kalimah, knowing its meaning, acting by its inward and outward requirements, negating shirk and affirming worship for Allaah alone, having an unwavering belief in what it implies, and acting in accordance with it - then he is a true Muslim. Whoever utters it and acts upon its requirements outwardly, but without believing in what it necessitates, then he is a hypocrite (munaafiq). Whoever utters it with his tongue, but acts contrary to it with [acts of] shirk that negate the kalimah, then he is a self-contradicting mushrik (1).
So it is essential to not only utter this kalimah, but to also have knowledge of its meaning, since this will be a means towards acting in accordance with its essential requirements. Allaah, the Exalted, said: “Except those who bear witness to the truth and have knowledge.” [Soorah az-Zukhruf 43:86].
Acting according to its requirements means worshipping Allaah alone and rejecting the worship of anything else besides Him; this being the greatest implication of this kalimah.
Also, from the requirements of laa ilaaha illallaah is to accept Allaah’s Prescribed Laws (sharee’ah) in matters of worship, social transactions and in what is lawful and unlawful, as well as to reject all other laws besides it. Allaah the Most High said:
“Or do they have partners with Allaah who have prescribed for them a religion that Allaah has not ordained?” [Soorah ash- Shooraa 42:21]
It is therefore obligatory to accept the Prescribed Laws of Allaah in matters concerning worship, social transactions, judging between people in that which they differ regarding their personal situations and other matters, whilst [at the same time] rejecting man-made laws. What this means is to reject all the innovations and deviations that have been introduced and propagated by the devils - from amongst mankind and the jinn-in the matter of worshipping Allaah. Indeed, whoever accepts anything of this has actually committed shirk in [the matter of] obedience to Allaah, just as Allaah said in this verse:
“Or do they have partners with Allaah who have prescribed for them a religion that Allaah has not ordained”? [Soorah ash- Shooraa 42:21].
And Allaah the Most High said: “If you were to obey them, then indeed you would be mushriks.” ] Soorah al-An’aam 6:121[. 
“They take their rabbis and their priests to be lords besides Allaah.” ]Soorah at-Tawbaa 9:31].
In an authentic narration the Prophet sallallahu alaihi wasallam once recited the above verse to ‘Adee ibn Haatim at-Taa’ee radhiyallahu anhu, said: O Messenger of Allaah, we do not worship them. So he replied: “Do they not make lawful to you, that whch Allaah has made unlawful, which you then deem as lawful? And do they not make unlawful to you that which Allaah has made lawful. which you then deem as unlawful? He said: Yes indeed. So the Prophet sallallahu alaihi wasallam said to him: “this is worshipping them.” (2)
Shaykh ‘Abdur-Rahrnaan ibn Hasan, rahimahullaah, said: “In this hadeeth is a proof that obeying the rabbis and priests in those matters which constitute disobedience to AlIaah is actually [an act of] worshipping them besides Allaah. This is one of the major [types of] shirk that Allaah does not forgive…”(3)
So this is the major hype of] shirk which negates the very tawheed that laa ilaaha illallah points towards.
Likewise, it is obligatory to reject referring judgment back to man-made laws, because it is obligatory to refer judgment back to the Book of Allaah and to abandon referring judgment to whatever opposes it from the man-made systems and laws. Allaah, the Most High, said: “If you differ in anything amongst yourselves, refer it back to Allaah and His Messenger.” [Soorah an-Nisaa 4:59].
Allaah the Exalted also said: “In whatever you differ, the judgment is for Allaah. Such is Allaah, my Lord.” [Soorah ash-Shooraa 41:10].
Allaah, the Most Perfect, has declared that the one who does not judge by what Allaah has revealed, has committed unbelief (kufr), wrong-doing (dhulm) and sin (fisq), and faith has been negated from him. So if a person judges by other than what Allaah has revealed, deeming it permissible to do so, or deeming that it is better or more appropriate than Allaah’s Judgment, then this is [the greater type of] kufr and shirk which totally negates tawheed and which completely nullifies laa ilaaha illallaah. If, however, he does not deem it permissible to do so, rather he believes that it is obligatory to judge by Allaah’s Judgment, but he is overcome by desires which cause him to act contrary to it, then this is the lesser type of kufr and shirk which decreases [adherence to] laa ilaaha illallaah and its requirements, [but does not take the person outside the fold of Islaam].
Thus laa ilaaha illallaah is a complete and integral way of life. It is obligatory for the Muslims to follow this way in their [modes of] worship and in their conduct and behavior. It is not merely a word that is uttered for gaining blessings, or to be merely uttered as part of the morning and evening recommended supplications; without understanding its meaning, or acting upon its requirements, or traversing its path - as many of those who utter it with their tongues, but oppose it in their beliefs and behavior, actually think!
1) The Shaykh, hafidhahullaah, further explained in al-Muntaqaa min Fataawaa (1/9-10) “Whoever utters the testification of laa ilaaha illallaah muhammadur-rasoolallah, the ruling of him being a Muslim starts there and then and his blood is sacred. If he acts upon the requirements inwardly and outwardly, he is a true Muslim, and for him are good-tidings, both in this world and in the Hereafter.
If he acts upon the requirements, but does so only outwardly, then he is judged to be a Muslim based upon his outward conduct and he is treated as a Muslim, even though inwardly he is a hypocrite (munaafiq) whose affair is left to Allaah. If he does not act upon the requirements of laa ilaaha illallaah, but satisfies himself with merely pronouncing it, or he acts in opposition to it, then the ruling of apostasy will be applied to him, and he will be treated as an apostate. If he acts upon some of its requirements without acting upon others, then it will have to be seen: If the requirements that he has left constitute apostasy, then he will be judged as an apostate; such as intentionally abandoning the Prayer, or directing any form of worship to other than Allaah. If, however, that which he has left does not constitute apostasy, then he will be considered a believer whose faith (eemaan) is deficient in proportion to what he has left; such as those who commit sins that are of a lesser degree than [the major acts of] shirk.”.
2) Hasan: Reported with this wording by al-Bayhaqee in as-Sunanul-Kubraa (10/116) and lbn Taymiyyah declared it to he hasan in Majmoo Fataawaa (7/67). It has also been reported by at Tirmidhee (no. 3094) with a slightly different wording.
3) Fathul-Majeed (2/653).

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