If you’re considering starting a business, you may wonder if you need to initially register it as a Limited Liability Corporation (LLC). The answer to that question is no. However, forming an LLC may be beneficial to you depending on the size of your new business. Below we explore more of the benefits and drawbacks of an LLC to help you reach the best decision on your own. We also include some alternative options.
Non-LLC Types of Business Registration
If you choose not to register as an LLC, you can opt for a limited liability partnership (LLP) or corporation status if you meet the legal requirements for those designations. While registering as an LLC, LLP, or corporation each have distinct advantages, all limit your personal liability for debts you incur on behalf of your business.
You can also operate as a sole proprietor if you run the business by yourself with no employees. Sole proprietorship does not require formal registration, and you claim your income and deductions on your personal tax return. If you have a business partner, you can choose to operate as a general partnership. Sole proprietorships and general partnerships offer these advantages:
- Working as a sole proprietor gives you the chance to see if your new business will be profitable before committing to a more formal business structure.
- You don’t need to pay another party to act as your registered agent as a sole proprietor. This business classification also saves you from having to pay reporting fees to your state every year or a fee for business formation.
- You can start running your business faster without the registration and documentation requirements. If you don’t do business in your own name, the laws in your state may require you to register the business name with the Secretary of State.
Not Operating as an LLC Can Leave Your Personal Finances Vulnerable
On the flip side, you open yourself to financial risk when you don’t register your business as an LLC. If you can’t pay your business creditors or a customer sues you, you may need to use your personal assets to settle the issue. An LLC protects your home, vehicle, bank accounts, and other personal assets from seizure. You would stand to lose your business assets only.
Forming an LLC also helps if you plan to apply for business financing as banks will have more confidence in your ability to repay. If you operate with one or more business partners, the LLC operating agreement helps to resolve such issues as dividing profits and responsibilities.
Steps to Take to Form an LLC
Meeting with a tax professional before choosing a business registration classification is always a good idea. Should you choose to move forward, we recommend that you start the process by drafting an operating agreement that indicates details such as owner names, responsibilities, and how to divide assets and liabilities. You should also include a statement about how you and your business partners intend to operate the new company and manage any business disputes. Be sure to research local laws to find out if you also need a business license.
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