Do I Need An LLC To Start A Business?

One of the most popular business structures for small businesses is the limited liability company (LLC). There are several advantages to the LLC structure compared to other structures. But, really do I need an LLC to start a business?

The formation of an LLC is not necessary to start a small business, but in most cases, the benefits of doing so are worth the minimal cost and effort.

The LLC, or limited liability company, protects individuals from liability and provides a formal type of business structure. Those things can also be obtained by forming a corporation or other type of business entity.

In this article, we will go over some advantages of starting an LLC and other popular business structures so you can determine which is right for you.

If an LLC seems like the right option for your business, you can take a look at our how-to form an LLC guide for easy, step-by-step instructions.

What Is an LLC?

Essentially, an LLC protects its owners’ personal assets with the corporate liability protection of a corporation while offering the pass-through taxation of a sole proprietorship or partnership. An LLC can be owned by one or more individuals. An LLC with one owner is called a single-member LLC, while an LLC with more than one owner is called a multi-member LLC. To learn more, visit our guide on What Is a Limited Liability Company.

Advantages of an LLC for Business

LLCs offer personal liability protection. As a result, your private assets (car, house, bank account) are protected in case your business is sued.

Due to their tax benefits and personal liability protection, LLCs are able to increase profit and risk.
LLCs are generally more trusted by both banks and consumers than informal business structures such as sole proprietorships.

Limited liability companies don’t have any restrictions on ownership. This gives you flexibility in regards to taxation and management, regardless of how many owners there are.

It is true that forming an LLC is expensive at first, but it is a small inconvenience compared to what it is likely to cost to raise capital in the long run under a partnership or sole proprietorship.

There is no obligation for you as the creator to be involved in the day-to-day operations of your LLC. In the event that you don’t like the idea of making big decisions, you can employ someone who can (like your CEO) so that your company functions more like a corporation. Additionally, this employee need not be a member of your LLC.

For LLC members, there are several great advantages when it comes to profits and losses. Each LLC member may claim their share of profits and losses on their personal tax returns, and members can decide how profits and losses will be divided.

Starting a Business Without an LLC

There are two ways to run your business if you do not form an LLC. The first step is to establish another type of business entity, such as a corporation or limited liability partnership, with your state.

As an alternative, you can operate your business without establishing a formal business entity at all. You will be a sole proprietor if you are the only owner. You will be in a general partnership if you own your business with one or more other people. Going this route has a few advantages:

Ease: It is possible to be up and running without having to file documents with the state. Even so, you may still need a business license or permit from your locality, and, if your business name isn’t the same as your own, you may be required to register a fictitious name, or DBA (“doing business as”).

Inexpensive: In most states, there is no business formation fee or annual reporting fee. Furthermore, you won’t have to pay someone to act as your registered agent.

Proof of concept: A solo side gig may be appealing if you’re not sure you’ll really make much money from your new business. Forming an LLC later is always an option.

Risks of Starting a Business Without an LLC

You leave your personal finances vulnerable to business problems if you don’t form an LLC or other business entity. Your operations may also suffer from a lack of formal structure.

Starting a business without an LLC has the following disadvantages:

Personal liability: If you’re a sole proprietor or general partner and your business is sued or has unpaid creditors, you are personally responsible. All of your assets are at risk. Additionally, you may be liable for the business activities of your co-owners and employees. LLCs change that equation. As an LLC owner, you may lose everything you have invested in the business, but your home, business bank account, and other assets remain safe.

Lack of structure: Many business partners don’t give much thought to how responsibilities are divided, profits and losses, or what will happen if there are disagreements or someone wants to leave. Eventually, these issues will arise. By setting up rules and a framework in your LLC operating agreement, you can minimize costly conflicts later on.

Limited funding: Investors and banks may be hesitant to lend or invest in a sole proprietorship or general partnership.

Proprietary name: A business entity cannot have the same name in more than one state, and forming an LLC ensures that the name you choose remains unique.