Do I Need an LLC to Start a Business?
You do not need an LLC to start a business, but for many businesses the benefits of an LLC far outweigh the cost and hassle of setting an LLC up.
An LLC, or limited liability company, provides personal liability protection and a formal business structure. You can also get those things by forming a corporation or other type of business entity. It is also perfectly legal to open a business without setting up any formal structure. You will gain simplicity but miss out on some key protections.
Here is a look at the risks and benefits of starting a business without an LLC.
Starting a Business Without an LLC
If you do not form an LLC, there are two types of legal options for running your business. The first is to file paperwork with your state to establish another type of business entity such as a corporation or limited liability partnership.
Each business entity type has its own benefits, but all of them have one key feature: They limit your liability for business debts.
Your other choice is to operate your business without creating a formal business entity at all. If you are the only owner, you will be a sole proprietor or sole prop. If you own your business with one or more other people, you will be a general partnership. Going this route has a few advantages:
- Ease. You can be up and running without having to file documents with the state. However, you may still need a business license or permits from your locality and, if your business name isn’t the same as your own name, you may have to register a fictitious name, or DBA (“doing business as”).
- Inexpensive. You will not have to pay your state’s business formation fee or annual reporting fee. You also will not need to pay someone to act as your registered agent
- Proof of concept. This may be especially appealing if your new business is a solo side gig and you are not sure you will really make much money. You can always decide to form an LLC later
Starting a business without an LLC does, however, carry significant risks, especially if you have business partners or employees.
Risks of Starting a Business Without an LLC
If you don’t form an LLC or other business entity, you leave your personal finances vulnerable to business problems, and your operations may suffer from the lack of formal structure.
Disadvantages of starting a business without an LLC include:
- Personal liability. If you are a sole proprietor or general partner and your business is sued or has unpaid creditors, you personally face liability. Everything you own is at risk. You also may be liable for business-related activities of your co-owners and employees. An LLC changes the equation. As an LLC owner, you might lose everything you have invested in the business, but your personal home, bank account, and other assets are protected. This is one of the main benefits of an LLC or other business entity.
- Lack of structure. Many business partners do not give much thought to the details of how to divide responsibilities, profits and losses, or what will happen if there are disagreements or someone wants to leave. These issues will come up eventually. Your LLC operating agreement sets up rules and a framework that can minimize expensive conflicts later.
- Limited funding. Banks and investors may be reluctant to loan or invest money in a sole proprietorship or general partnership.
- Proprietary name. Two business entities cannot have the same name in the same state, and forming an LLC helps ensure that the name you have chosen is unique and will stay that way.
If you have questions, consult with LNK Tax Group for your tax needs. We offer a free 20-minute initial consultation to see how we can best help you with your taxes. Visit us at www.lnktax.com to schedule an appointment