Do You Need an LLC? Pros and Cons (+ Alternatives)

If you’ve got a small business or are planning to start one, you’ve probably faced this question: 

Do you need an LLC? 

In today’s post, I’ll help you find the answer so that you can focus on growing your business and creating freedom and flexibility for yourself.

We’ll go over: 

• What an LLC is
• How an LLC compares to other business structures
• Who can benefit from an LLC
• How to start an LLC
• And much more

Ready to get started?

Let’s dive right in!

Do you need an LLC? 

First off, what is an LLC?

A limited liability company (LLC) is one of the most popular business structures in the US.

Its defining feature is that it functions as an entity that’s legally independent from its owner (or owners). 

That means LLC owners are protected from personal responsibility for their company’s liabilities. 

This is just one reason why many small business owners opt for an LLC structure.

But know this: An LLC isn’t required to start a small business, and it might not be the right option for you. 

💡 In fact, according to the National Small Business Association, only 43% of small businesses are LLCs. 

With that in mind, let’s take a quick look at some of the alternatives to an LLC. 

How do you start a business without an LLC? 

As a business owner, you’ve got several business structures to consider. 

So choose wisely!

The structure impacts various aspects of your business, including things like daily operations, taxes, and legal protections. 

Here are some of the most common LLC alternatives:

• Sole proprietorship: With this structure, there’s one owner and no distinction between the owner and the business. This option is both easy to form and dissolve. However, the owner can be held liable for the business’s debts. 
• Partnership: This is another relatively simple option that suits a business of two or more people. Each partner takes on responsibilities within the business and shares any profits and losses. There are a few different types of partnerships, including general, limited liability (LLP), and joint venture (JV). 
• Corporation (or C corp): A corporation is a legal entity that’s entirely separate from its owners, who are known as “shareholders.” It therefore offers the strongest protection from personal liability. However, it also requires more complex record-keeping, and profits are subject to corporate income taxes. 
• S corporation (or S corp): An S corp is similar to a C corp but functions as a pass-through entity. That means that the income produced isn’t subject to corporate taxes. Instead, it goes directly to shareholders, who are then responsible for any related tax filings.  

As you can see, each structure has its pros and cons, and there are several factors to consider when deciding which one’s right for you. 

Business Structure	Number of Owners	Taxes	Liability
Limited liability company (LLC)	1+	Taxed as a sole proprietor, partnership, or corporation	Owners not  personally liable
Sole proprietor	1	Self-employment & personal taxes	Unlimited personal liability
Partnership	2+	Self-employment (except in some cases) & personal taxes	Unlimited personal liability (except in some cases)
Corporation (C corp)	1+	Corporate taxes	Owners not  personally liable
S corporation (S corp)	1–100	Personal taxes	Owners not  personally liable

It’s important to familiarize yourself with the different structures, as they’ll come up throughout this post.

Now, let’s discuss the benefits of an LLC. 

What are the benefits of an LLC? 

First, it’s important to note that regulations around LLCs vary depending on the state you’re operating in. 

That said, there are a number of overarching benefits for LLC owners — or “members,” as they’re often known.

LLC members may include individuals (US citizens or foreigners), corporations, and even other LLCs. 

However, some entities are forbidden from LLC membership, such as insurance companies and banks. 

Got it?

Then let’s jump into the benefits!

1. Protect your personal assets 

As I mentioned earlier, an LLC functions as an entity that’s legally separate from its members. 

So, if you’ve got an LLC, your personal assets are protected in case of debts or other liabilities linked to the LLC. 

For example, let’s say you’ve got a financial coaching business. 

Despite offering your best advice to help a client get out of debt, they end up making some bad choices and incur even greater losses. Then, they decide to sue you. 

(This isn’t a typical scenario, but you DO want to be prepared for everything.) 

As long as you’ve got an LLC, only the LLC’s assets will be vulnerable in the lawsuit.

Similarly, if your LLC faces bankruptcy, creditors can only pursue the LLC’s assets. 

That means you won’t have to worry about potentially losing precious personal possessions like your savings, home, or car. 

In this way, an LLC can bring some much-needed peace of mind to small business owners, especially if they’re testing out a new idea. 

But forming an LLC isn’t the only way to protect yourself — and it’s not a cure-all. 

Make sure you also use carefully drafted contracts with all of your clients. 

And, depending on your industry, consider getting insurance. 

For more on how LLCs can protect your personal assets, check out this video:

Next up: Taxation. 

2. Offer taxation flexibility 

Another benefit of LLCs is that they can choose to be taxed by the Internal Revenue Service (IRS) in a few different ways, depending on how many members they have.

First, there are the default taxation options:

For single-member LLCs, the default taxation status is that of a sole proprietorship. 

In this case, the business’s income and expenses are passed through to the business owner, and the IRS essentially “disregards” the LLC as an independent entity. 

In the meantime, if the LLC has more than one member, it’ll be treated like a partnership. 

A partnership is taxed similarly to a sole proprietorship, but the profits and losses are divided among the various members. 

The members then report the amounts on their personal returns. 

👉 Now, here comes the choice:

Multi-member LLCs can instead elect to be taxed like a C or S corporation.

There are a few reasons why they might want to do this, such as reinvestment strategies or owner benefits. 

I won’t get into all of that now. 

But here’s what you should know:

When filing as a C corp, the LLC gets taxed twice: At the corporate level and again at the personal level. 

Meanwhile, when filing as an S corp, the LLC’s taxes are passed along directly to the members.

To make the right decision for you, you’ll want to have a more detailed look at each taxation option. 

3. Simplify business management  

LLCs are known to be relatively easy to manage, which is another reason why many small business owners choose this structure. 

Members of an LLC can choose between two overarching management structures: 

1. A member-managed LLC: In this case, all members contribute to managing the business. That said, the roles don’t need to be distributed equally.  
2. A manager-managed LLC: Here, members designate one or more managers to oversee all operations. The managers could be members themselves, but they don’t have to be.

Now, within those two LLC management structures, members have a lot of flexibility. 

They can develop a management system that suits their preferences and needs. 

The system is then outlined — alongside other basic information about the LLC’s operations — in what’s known as an operating agreement.  

Beyond the agreement, which is an essential document for any LLC, the amount of annual paperwork required for LLCs is pretty minimal. 

So, how does this compare to managing a corporation? 

Corporations tend to be much more complicated. That’s because they’ve got lots of regulations to follow. 

For example: 

Most corporations are required to have annual shareholder meetings, a board of directors, and traditional leadership roles like CEO. 

If that sounds like more than you’re up for, an LLC might be just the thing you need. 

4. Improve credibility   

One of the less tangible benefits of forming an LLC is also one of the most important: Credibility. 

Unlike a sole proprietorship or a partnership, an LLC is a more formalized business structure. Your potential clients, vendors, and partners will see that. 

How? 

Well, first of all, when you form an LLC, you’ll have to pick a name for it. 

The name must include the words “limited liability company” or the initials “LLC.”

This clearly shows people:

• That you take your work seriously
• That you’re willing to put in the effort to get registered
• That your business is, in fact, a real business 

Of course, sole proprietorships and partnerships are also real businesses. 

But they’re often viewed as less legitimate than an LLC or a corporation. 

5. Secure name ownership 

Alongside the legitimacy that comes with an LLC designation, you’ll also get brand protection. 

Once you’ve got a name registered for your LLC, no other business in your state can use it.

This is SO important. 

After all, your name embodies your brand, and your brand is what sets you apart from competition. 

👉 My advice? Keep your brand as safe as possible.  

I talk more about the importance of your brand here:

What are the cons of an LLC? 

Despite the many benefits we just discussed, an LLC isn’t ideal for every business. 

So, when deciding whether you need an LLC, you need to take the potential downsides into account. 

Let’s take a look at a few: 

More complex procedures

I mentioned before that an LLC is relatively easy to manage, especially compared to a corporation. 

However, an LLC does require more work to manage than a sole proprietorship, which is the simplest and cheapest business structure. 

Depending on the state, a sole proprietor may need a trade name and certain business permits.

But they don’t need to do too much else. 

And remember: Sole proprietors can file their business taxes along with their personal ones. 

For these reasons, many new freelancers, consultants, and entrepreneurs stick to a sole proprietorship.

As I always say: 

When you’re starting out, the easiest route is often the best one. 

That way, you can focus your energy on what really matters: Getting your first client.

More expensive

Similarly, forming an LLC comes with some additional costs that sole proprietors don’t face. 

These costs vary by state, and they might include things like: 

• Filing fees 
• The operating agreement 
• Business license fees
• DBA fees
• Annual report fees 

I recommend looking into the potential costs to see which would apply to you and your business.

But in short: Starting an LLC could cost anywhere from hundreds to thousands of dollars. 

So, if you’re not making much from your new business or side hustle, you might not be ready to invest in the formation of an LLC. 

Difficult to raise capital 

Another potential downside of forming an LLC is that it can be more difficult to raise capital. 

The thing is, LLCs are private ownership agreements. That means they can’t issue stocks like a corporation can.

Some investors might choose not to engage with an LLC because they prefer the more familiar corporate stock structure.  

However, LLCs can raise capital in many other ways, such as: 

• Crowdfunding
• Venture capital investments
• Small business loans
• Government grants
• Personal assets 

💡 Plus, an LLC can always be converted into a corporation if necessary. 

Regulations vary from state to state 

Lastly, because regulations for LLCs vary from one state to another, things can get complicated.

Regulations on the following aspects of an LLC tend to vary: 

• Name 
• Formation 
• Taxation
• Annual reports and fees
• Management 
• Record-keeping
• Dissolution processes

So, if you’re hoping to offer your services in more than one state, I recommend closely reviewing the various regulations before you decide whether you need an LLC. 

Who can benefit the most from an LLC? 

Now you know the pros and cons, let’s look at the types of business owners who are most likely to benefit from forming an LLC. 

1. If you have business partners or employees

The flexibility of an LLC may be ideal if you’re planning to work with business partners or employees.

That’s because there’s no limit on the number of members in an LLC. 

You can start out on your own, like I did, and then add more members as you grow.  

Another reason is that, unlike corporations, an LLC can distribute profits in various ways. 

👉🏻 For instance, you can develop a profit-sharing agreement based on various levels of member investment or involvement. 

You can also attract talent using profit interests. 

These give the recipient the right to a share of the LLC’s future profits. 

2. If your business has significant financial risks

Businesses that take (or plan to take) significant financial risks can also benefit from LLC status. 

As we discussed, LLCs provide a crucial layer of separation between personal and business assets. 

This separation is sometimes referred to as a corporate shield or veil because it protects the members from certain damages.

So, if you’ve got personal assets that might be at risk, consider forming an LLC. 

But remember: The corporate shield isn’t invincible. 

You’ve got to stick to certain rules and procedures in order to maintain the protected status. 

3. If you want to establish a professional image 

Finally, if you’re looking to boost the professionalism of your business, forming an LLC can be a solid step to take.

Once you’ve got the “LLC” designation in your business name, it’ll indicate to others (clients, partners, or investors) that you’re serious about what you do.  And as research shows, trust is SUCH a big factor in people’s decisions to buy a product or service. 

In fact, trust is how I got my first client – by offering free guidance and taking the time to build a solid relationship.

However, you can build that trust in other ways, too. After all, the way I did it wasn’t through an LLC. Instead, I provided tons of value before selling anything.     

How do you start an LLC? 

So, are you ready to start your LLC? 

First, you’ve got to qualify. 

Luckily, in most states, that simply means being at least 18 years old. 

There are no residency requirements, and you don’t need to be a US citizen. 

If that’s all good then you can dive into these seven steps: 

1. Choose a name
2. Designate a registered agent
3. Pick a management structure
4. Create an operating agreement
5. File your articles of organization
6. Apply for an employee identification number (EIN)
7. Obtain any necessary permits

If that sounds like a lot to take on, don’t worry! 

It’s actually possible to submit much of the paperwork online, and the whole process can be completed in a matter of days (at least in certain states). 

That said, you can also seek out help. 

Personally, I recommend consulting with a legal professional to make sure everything’s in order. 

For example, my friend Lisa Fraley, an attorney and legal coach, offers an LLC formation and filing package. This includes everything you need to get started with the process.  

The US Small Business Administration (SBA) also has a number of useful guides and lists of local organizations that provide training, funding, and other opportunities. 

Next steps

There you have it. Now you know whether you need an LLC – or if you should go for a different structure. 

Once you’ve made up your mind, it’s time to focus on building your business to scale. 

And the easiest way is to follow a roadmap by someone who has done what you want to achieve.

Want to learn more? 

My FREE blueprint will show you exactly how to grow your business. 

Learn more:

Legal Requirements for Life Coaching

How to Write a Business Plan

The Online Business Checklist 

The Top Benefits of Entrepreneurship