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's also perfectly legal to open a business without setting up any formal structure. You'll gain simplicity but miss out on some key protections.
Here's a look at the risks and benefits of starting a business without an LLC.
Starting a business without an LLC
If you don't 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'll be a sole proprietor. 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 won't have to pay your state's business formation fee or annual reporting fee. You also won't 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're not sure you'll 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're 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 don't 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 can't 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.