There’s a lot of buzz online about forming a Limited Liability Company (LLC) when starting a business—but before you dive in, it’s important to know: not everyone needs to rush into creating one.
Yes, an LLC can offer protection by separating your personal assets from your business liabilities. But forming one is more than just filling out paperwork—it comes with ongoing responsibilities, costs, and some legal realities that many business owners aren’t fully aware of.
Here’s what you need to know before you decide if an LLC is right for you:
1. You’re Creating a New Legal Entity
When you form an LLC, you’re establishing a brand-new legal “person” in the eyes of the law. You (and any business partners) become “members,” and the LLC becomes its own entity—typically a citizen of the state where it’s formed.
Even if you’re a solo entrepreneur, the LLC is not you. It needs to be treated accordingly. That means:
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Filing renewals or reports annually (rules vary by state)
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Getting a separate EIN (Employer Identification Number)
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Opening dedicated business bank accounts
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Keeping your business and personal finances completely separate
This isn’t optional. It’s the foundation of the legal protections an LLC offers.
2. Business Finances Must Be Kept Separate
This is where many business owners slip up. The LLC structure can protect your personal assets—but only if you treat the business like a separate entity in practice, not just on paper.
That means:
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Paying yourself properly, via paycheck or owner’s draw
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Avoiding using the business debit card for personal expenses (ever)
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Documenting transactions clearly and maintaining clean records
If you mix personal and business finances, you risk “piercing the corporate veil,” meaning a court could disregard your LLC and hold you personally liable. In short: if you don’t treat the LLC as separate, neither will the law.
3. Tax Benefits Aren’t Always Immediate
LLCs can offer potential tax benefits—but these depend on how the entity is structured and how much revenue the business generates.
For example, electing to have your LLC taxed as an S-Corp may reduce self-employment taxes once your profits hit a certain threshold. But if your business isn’t generating significant income yet, the difference may be minimal.
Talk to a tax professional before choosing a structure—what works for one business may not make sense for yours.
Understand the Benefits and the Costs
Online platforms make LLC formation seem quick and easy—which it can be. But they often don’t mention the hidden costs of maintenance and compliance.
In some states, LLC renewals and franchise taxes are expensive. One of my clients, for example, pays $800 annually just to keep her LLC active.
Before forming an LLC, ask yourself:
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What assets am I protecting?
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What are my state’s annual fees and reporting requirements?
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At my current income level, are there any real tax advantages?
Final Thoughts
Forming an LLC can be a smart move—but it’s not the only path to legitimacy or success in business. Make sure you understand the responsibilities and the financial impact before moving forward.
Talk to a tax professional or legal advisor who understands your business. And don’t be afraid to start as a sole proprietor while you build. There’s nothing wrong with laying a solid foundation first.