Do I Need An LLC to Start My Business?

So you’ve made the decision to start your own business. Congratulations! For many people, this major life decision often comes with more questions than answers. One question that I hear regularly is, “my friend recently started a new business and she registered as an LLC, do I need an LLC to start my business?”

The short answer is no. Fortunately, there are many different types of business entities that can be organized under New York State law, including sole proprietorships, limited liability companies (“LLCs”), partnerships, and corporations. When deciding how to set up your new business, the three biggest factors to consider are liability, taxes and costs & fees.

In terms of liability, the ultimate issue is really whether there will be personal liability for the business owner. For example, under a sole proprietorship, the individual operating the business is personally liable for all business disputes. This means that if there was a lawsuit against a sole proprietorship claiming money damages and the business owner lost the dispute, the plaintiff in that case could pursue the sole proprietor’s personal bank accounts, home and any other personal assets in their name to satisfy the money judgment.

In stark contrast, LLCs provide limited liability to its members. What this means is that the individual members of the LLC cannot be held personally liable for disputes raised against the business. Of course there are certain limitations; however, generally speaking, the LLC is a separate corporate entity from its members and therefore those who wish to file a lawsuit must pursue the business directly.

From a tax perspective, both sole proprietorships and single-member LLCs attribute taxes directly to the business owner. There is no legal distinction between the business and its owner, therefore the profits and losses fall upon the individual. For corporations, the corporate entity and its shareholders (i.e., owners) are taxed separately. This is often criticized as a form of double taxation on the same profits and leads many to avoid this legal structure altogether. Depending on what type of business you plan on starting and how many partners you will have helps to determine which corporate entity makes the most sense.

Finally, the costs and fees associated with forming these different business entities can be a deciding factor for those looking to keep startup costs low. Registering a sole proprietorship can cost little to nothing in filing fees, whereas the cost of forming an LLC or corporation can run anywhere from $1,000 to $3,000 depending on the county in which the business will operate.

Ultimately, when deciding how you want to organize your business, considering the liabilities, tax structure and costs & fees associated with the different entity types will help to guide the business owner towards the best option for their business. While an LLC is a great choice for many new business owners, it is not an absolute requirement to operate a business in New York state.

Disclaimer: This blog post and similar posts are not to be considered as providing legal advice. The discussion here is meant for educational and informational purposes only and shall not create an attorney-client relationship with the readers of this content.