Do You Need an LLC to Start a Business? Pros, Cons, Alternatives

Starting a business in the US doesn't require forming a Limited Liability Company (LLC). However, understanding the implications can help you make an informed decision.

An LLC offers benefits such as personal liability protection and potential tax advantages, but it is not the only option available. Many entrepreneurs begin as sole proprietors or partnerships. These may be simpler to establish but come with different legal and financial considerations.

This article will explore whether you need an LLC to start a business, the pros and cons of forming one, and alternative structures to consider.

Do You Need an LLC to Start a Business?

No, you do not need an LLC to start a business; however, depending on your goals, forming one may be a smart move.

When you launch a business in the US, you are automatically considered a sole proprietor (if you're on your own) or a partnership (if you have co-owners). This is unless you formally register a different structure like an LLC or corporation. These informal structures are easy to start and have minimal paperwork. However, they do not offer personal liability protection.

An LLC, or Limited Liability Company, is a legal entity that separates your assets from your business assets. If your business is sued or faces debts, your finances are generally protected. LLCs also offer flexibility in how you're taxed (either as a sole proprietorship, partnership, or corporation). This can add a level of credibility to your brand.¹

Whether you need an LLC depends on your risk level, growth plans, and the level of separation you want between your personal and business finances. Some entrepreneurs start as sole proprietors and form an LLC later, while others choose to set up an LLC from the beginning to shield themselves legally from the outset.

Pros of Starting with an LLC

Forming an LLC when you start your business comes with several significant advantages:

Legal Protection and Tax Benefits

One of the biggest benefits of an LLC is limited liability protection. This means that if your business faces lawsuits, debts, or other legal issues, your personal assets are generally protected. This includes your house or savings.

Additionally, LLCs offer a powerful tool in your financial strategy-tax flexibility. You can choose to have your business taxed as a sole proprietorship, partnership, S corporation, or C corporation. This depends on what best fits your financial strategy. Many small businesses opt for pass-through taxation. This means business profits are taxed only once on the personal return, thereby avoiding corporate double taxation.²

Professional Image and Brand Trust

Having “LLC” in your business name often signals stability. It shows professionalism to clients, investors, and partners. It can give you a competitive edge, particularly in industries where trust and credibility are crucial.

An LLC structure may also make it easier to open a business bank account and apply for business credit. It might also help with negotiating contracts with larger companies.

Alternatives to an LLC for Starting a Business

If you're not ready to form an LLC, there are several other business structures to consider. Each option has its advantages depending on your goals, risk tolerance, and how you plan to operate:

Sole Proprietorship

The simplest and most common way to start a business. As a sole proprietor, you and your business are legally the same entity. This means you’re personally responsible for all debts and obligations. It’s easy to set up and manage, but you don’t get liability protection.

Partnership

If you’re starting a business with someone else, a partnership might make sense. In a general partnership, partners share profits, losses, and management responsibilities. Like a sole proprietorship, partnerships are relatively simple to form. However, it offers no personal liability protection. This is unless you establish a limited partnership (LP) or limited liability partnership (LLP).³

Corporation

A corporation is a more formal business structure that offers strong liability protection. On the other hand, it comes with greater regulatory requirements.
Corporations are treated as separate legal entities and are taxed separately from their owners. S corporations allow profits to pass through to owners’ tax returns.⁴ Corporations are often ideal for businesses that plan to raise capital or eventually go public.

What’s Better: Sole Proprietor or LLC?

Choosing the right structure depends on factors like liability risk, tax goals, and your plans for future growth. Some entrepreneurs start simple and formalize their structure later as their business expands. When considering whether to opt for a sole proprietorship or an LLC, consider your business needs. Also think about financial goals, and risk tolerance.

A sole proprietorship is easy and inexpensive to start. There’s typically no formal registration beyond local permits or licenses. You report income on your personal tax return, and you have complete control over the business. However, there’s one major drawback: no personal liability protection. If your business faces debt or legal issues, your personal assets could be at risk.

An LLC, on the other hand, offers limited liability protection. This separates your personal finances from your business liabilities. It also gives you more flexibility when it comes to taxation—you can choose to be taxed as a sole proprietor, partnership, or even an S corp.

Modest setup and annual fees depend on your state. Many entrepreneurs find the added protection and professionalism worth the investment.
If you're just testing an idea or starting a low-risk side business, a sole proprietorship may be enough. However, if you plan to scale, work with clients, or want to protect your personal assets, an LLC is generally the safer and more future-proof option.

When Might You Not Need an LLC?

There are plenty of situations where forming an LLC isn’t necessary. This is especially true when you're just starting or operating with minimal risk.

Freelancers and Low-Risk Businesses

If you're offering services like writing, graphic design, tutoring, or consulting with limited legal or financial exposure, a sole proprietorship may be sufficient. These businesses typically have low startup costs. They also have lower risk of lawsuits or significant debt. This means the additional costs and paperwork associated with an LLC might not be worthwhile right away.

Hobby Income

If you're earning money from a passion project, such as selling crafts occasionally on Etsy or offering weekend photography services, and it's not your primary source of income, forming an LLC may be unnecessary. The IRS may even categorize this as hobby income rather than business income, depending on your intent and consistency.

That said, even small or low-risk ventures can grow quickly, and having an LLC in place early on can save you the trouble of reorganizing later. However, if you're just testing the waters, you can start small and formalize your structure as your business grows and matures.

Can I Start a Business Without Registering it?

Yes, you can start a business without formally registering it. This is the case if you're operating as a sole proprietor under your legal name. In this situation, no federal or state registration is required to begin offering products or services.

However, there are still a few key steps you may need to take depending on your location and business type:

• Business Licenses and Permits: Even unregistered businesses may need local licenses or permits to operate legally. This varies by city and industry, so it’s best to check with your local government or small business office.

• DBA (“Doing Business As”): If you plan to operate under a name other than your legal name, you’ll likely need to register a DBA (also called a trade name or fictitious name).⁵

• Tax Obligations: Regardless of registration status, you’ll still be responsible for paying taxes on your income and may need to collect sales tax if applicable in your state.

While it’s legally possible to start without registration, doing so can limit your options. This could limit you from opening a business bank account, accessing credit, or scaling your operations. For many, formalizing with an LLC or other structure becomes worthwhile as the business grows.

Discover Wise: The Account With Flexible Financial Tools for New and Growing Businesses

Whether you're just getting started as a sole proprietor or setting up an LLC, choosing the right buisness account can save time and money.

Wise Business helps you keep your finances organized from day one. With no monthly fees, international payments at the mid-market rate, and the ability to hold over 40+ currencies, Wise is designed for flexibility. You can also connect to your accounting software for seamless financial management.

Register with Wise Business 🚀

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in 40+ currencies. You can get major currency account details for a one-off fee to receive overseas payments like a local. You can also send money to 140+ countries.

	Editor & Business Expert:
	Panna is an expert in US business finance, covering topics from invoicing to international expansion. She creates guides and reviews to help businesses save time and make informed decisions. You can read more useful business articles on her author profile.

Sources:

1. How to Start an LLC: Complete Guide | Wolters Kluwer
2. Pass-through entity: Overview & FAQs | Thomson Reuters
3. Compare Types of Partnerships - LP, LLP, GP | Wolters Kluwer
4. How are S corporations taxed? Tips for filing and reducing taxes as a pass-through entity
5. What is a DBA & When to File One For Your Business | Wolters Kluwer
   All sources checked July 2025