Do You Need an LLC to Start a Business?

Do you need an LLC to start a business? No, but there are many advantages to using it that one cannot get from other business structures, and it is a very popular structure for new and small businesses for a wide variety of reasons.

The LLC is a business model that merges a corporation’s limited liability protections with a partnership’s operational simplicity. With an LLC, you are afforded personal protection—or limited liability—from legal judgments and creditor claims directed at your business; assets from your business may be seized, but your own may not. An LLC also offers flexibility in management structure and taxation, and it has few ownership restrictions.

More specifically, some of the benefits of the LLC include:

  • You can run your business as a single-member enterprise or be multi-member with any number of members you want.
  • You can enjoy greater potential for raising capital with an LLC than with a sole-proprietorship or partnership.
  • If you are in a multi-member LLC, limited liability means you do not share personal responsibility for another member’s negligence.
  • LLC membership interest can be offered to other corporations, partnerships, or LLCs.
  • An LLC can be taxed like a corporation, partnership, or sole proprietorship.
  • LLC members can pass through their share of the LLC’s losses and profits to their personal tax return.
  • An LLC can be run like a sole proprietorship or partnership, with heavy management involvement on your part, or like a corporation, where you will be less involved in the day-to-day affairs.
  • LLCs can divide losses and profits in any manner the members agree upon; equal distribution is not a requirement.

Risks of Starting a Business Without an LLC

In addition to considering the many benefits of starting a business as an LLC, you should also consider the risks should you not. Such risks include:

  1. No limited liability protection. If you are acting as a general partner or sole proprietor and your business is sued or is pursued by creditors, any or all of your personal possessions will be at risk. An LLC owner does not have to fear this because of limited liability protection.
  2. Lack of structure. In the course of forming an LLC, you will have to decide on how responsibilities will be divided, how losses and profits will be doled out, and how disagreements amongst members will be resolved, amongst other things. If you don’t figure this out beforehand, dealing with such issues when they arise will be much more difficult.
  3. Greater difficulty raising money. Investors and banks are generally more inclined to invest money in or loan money to a business with a solid business structure, like an LLC.
  4. Greater difficulty in marketing. An LLC is not allowed to use the same name as another in its state, which benefits LLC owners insofar as their potential customers are less likely to confuse them with another enterprise.

Starting a Business Without an LLC

It is possible to start a business without using the LLC structure, and you may be tempted to forego it because it just seems simpler, but many business owners find the benefits an LLC outweigh the hassle and cost of setting it up. That said, if you choose to not use an LLC, there are two other routes you may take:

  1. Choose another business structure. These include limited liability partnerships and corporations. If you find that one of these is better suited to your specific goals and situation, then you should go with one of them. Consulting an accountant or business lawyer before you make your choice is advised, however.
  2. Operate your business without a formal structure. You can do this as a single member with a sole proprietorship or with multiple members with a general partnership. No documents need to be filed with the state, although permits or business licenses from local authorities may be necessary. There are also no filing fees, annual report fees, or costs associated with having a registered agent. This may be a good choice if your business is just a side gig.

Do you need an LLC to start a business? Ultimately, that’s a question only you can answer, but if you need help understanding this question, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.