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Do I Need an LLC When Starting a Business?

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A limited liability company (LLC) is a type of business structure that provides many benefits to business owners. A primary benefit of an LLC is the protection from personal liability for the company’s debts and liabilities. However, there are other options if you decide not to form an LLC when starting up your new business. The two main options include registering as a different type of business structure, such as a limited liability partnership or corporation. The other option is to operate your business as a sole proprietorship or general partnership.

What is an LLC?

An LLC is a business structure in the United States whereby the owners are not personally liable for the company's debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.

What are the other formal business entity options?

Corporations

A corporation is a legal structure where the state sees the entity as separate from its owners. Therefore, a vital element of a corporation is its limited liability. The shareholders are not personally liable for the company’s debts. They have similar rights and responsibilities as an individual. This means that a corporation can enter into contracts, hire employees, own assets, file taxes, sue and be sued, and loan or borrow money. Either an individual or a group of people may form a corporation if they have a shared goal. Corporations are not always meant to obtain a profit.

Limited Liability Partnerships (LLP)

An LLP is a type of partnership where each partner has limited personal liability for the group. Partners won’t be held liable for damages from other partners but may be held responsible for contractural debts depending on the state you’re in.

What is a Sole Proprietorship?

A sole proprietorship is an unincorporated business with just one owner who pays personal income tax on profits earned from the business. Most small businesses start as sole proprietorships. It is the most straightforward type of structure to run your business. The business is treated as an extension of the owner. In other words, unlike LLCs, no legal distinction is made between the owner and the business. There are no necessary steps or paperwork you need to submit when operating a sole proprietorship. However, many people submit a “doing business as” request with their local county clerk’s office and obtain a Certificate of Assumed Name to take on an assumed name. Without this certificate, the sole proprietorship must operate under the owner’s name.

Note that this is not a formal business entity.

What are the benefits of starting a business without LLC filing?

There are several advantages to starting a business without a formal structure, including a sole proprietorship. These include fewer responsibilities to file paperwork, inexpensive costs, and a way to “test the waters” before fully committing to establishing an LLC.

  • Little required paperwork. You can run your business without having to file documents with the state you are working in. You may still need to figure out whether you are required to obtain a license or permit from your local government. You may need to submit a “doing business as” or DBA if you want to conduct business under a name other than your legal one.
  • Less costly. Unlike with an LLC, you aren’t required to pay any formation or maintenance fees. You also don’t have to pay for a registered agent service either.
  • Determine whether the business is profitable. When starting a business, it can be risky. If you’re unsure whether the business will make you money, you can try running the business without a formal structure before fully committing.

However, it is important to note that starting a business with filing for an LLC can carry significant risks. This is especially true when you have other business partners and/or employees.

What are the risks of starting a business without an LLC?

If you don’t create an LLC or other business entity, your personal property and finances may be at risk if any business problems occur. Also, the lack of formal structure can leave your business unorganized and without a framework to handle conflict. The following are some disadvantages for starting a business without an LLC.

  • You can be held personally responsible for any company debts. Everything you own can be potentially at risk. With an LLC, your investments into the business may not be regained in the case of bankruptcy, but your personal belongings are safe.
  • You’ll lack a framework. LLCs are strongly recommended to have an operating agreement. In this contract, the company will have the rules and framework listed out and can guide what to do in times of conflict.
  • Difficulty obtaining funding. Investors and banks may be less likely to provide a loan or invest money into your business without a formal structure. Filing for an LLC helps bring credibility to your business.
  • Your name is not trademarked. No other business working in that state can use your name when you register an LLC in your state. This is not the case with informal business structures such as sole proprietorships.

Should you start a business without an LLC?

Business owners often start with sole proprietorships and other less formal business structures. It requires minimal paperwork and is simple in design, as shown previously. Once the business grows, transitioning to LLC may have the advantage of offering protection against personal liability for bankruptcy.

Those who want personal liability protection, tax benefits, growth potential, credibility, and consumer trust should strongly consider forming an LLC. It is recommended for businesses with more extensive customer bases, increased risk of liability and/ or loss could potentially benefit from unique tax options and have the possibility for immediate sustainable profit. One immediate downside is the fees and more complex formation process than sole proprietorships. However, this can easily be made up for with the benefits your business can assume by establishing your company as an LLC.

Sole proprietorships work well for small-scale, low-risk, and low-profit businesses. Therefore the risk on an owner’s assets is minimal. The best business structure will depend on many factors, and it's recommended that you speak to a business lawyer before deciding.