Should You Start an LLC? The Pros and Cons
You’ve probably heard it a hundred times: Start an LLC!
People say it’s for your protection. And yes, I’ve even written about forming an LLC or other types of business structures.
But does an LLC really protect you?
The answer: Maybe, maybe not.
Here’s some conventional wisdom from Steve Scott, a blogger I admire. Steve talks about the “Red Sox Collapse” in business—when unexpected disasters hit and bring everything crashing down.
Disaster: “I’m Being Sued!”
Yes, you can get sued even if you run an online business. Whether you’re right or wrong, lawsuits happen. Unfortunately, that’s just the world we live in.
Is an LLC the Answer?
Maybe. Many people say every online business should be structured as a Limited Liability Company (LLC) because it offers legal protection.
That sounds great in theory. But is it always true? Not necessarily. Let’s break it down.
LLCs and Banking Issues
U.S. banking laws are strict about fraud, and consumers usually have strong protection. If someone scams you, there’s a good chance you’ll get your money back.
But if you own an LLC, things change. Business accounts don’t have the same fraud protection as personal ones.
For example, in New Jersey, some fraud laws only apply to individual consumers, not businesses. Courts may hold businesses to a higher standard, making it harder to recover lost money.
Here’s a real case:
A small company lost all its money when hackers broke into either its bank or its network. The business sued the bank, but the court ruled in favor of the bank. Why? Because as a business, the company was expected to understand the risks and take extra security measures.
Lesson: When you form an LLC, you might lose some protections you would have had as an individual.
LLCs and Credit Card Fraud
If someone steals your personal credit card information, federal law limits your liability to $50—or even zero in many cases.
But business credit cards don’t have the same protection. If a fraudulent transaction happens, your LLC might have to cover the loss. Banks assume that businesses should take extra precautions, so they don’t offer the same safety net.
Lesson: Your LLC could make you more vulnerable to fraud, not less.
LLCs and Lawsuits
One of the biggest reasons people form an LLC is for lawsuit protection. But does it really help? Let’s look at two examples:
Case #1: Small Claims Court Troubles
Joe runs an online business from home. He formed an LLC to protect himself. One day, his neighbor Fred sues his LLC in small claims court, complaining about delivery trucks causing a nuisance.
Normally, small claims court is simple—you can defend yourself without a lawyer. But since Joe’s LLC is the one being sued, he might be forced to hire a lawyer! Some states require businesses to have legal representation in court, turning a minor lawsuit into an expensive headache.
Lesson: Sometimes, an LLC can create more legal trouble than it prevents.
Case #2: “Piercing the Corporate Veil”
Let’s say Joe actually breaks the law while running his business. Can he just hide behind his LLC and keep his personal assets safe?
Not necessarily. Courts can “pierce the corporate veil” if they believe the LLC is just a front for Joe’s personal actions. If Joe committed fraud or acted irresponsibly, the government can go after his personal assets anyway.
Lesson: An LLC isn’t an invincible shield. If you run your business improperly, you can still be held personally responsible.
So, Should You Start an LLC?
There’s no one-size-fits-all answer. Some people benefit from forming an LLC, while others may actually take on more risks.
Before you decide, talk to a qualified attorney. And when you do, ask them about the points in this article. If they can’t give you clear answers, you might want to find a different lawyer.
Sometimes, lawyers are quick to recommend an LLC because they make money setting them up. Make sure you’re getting honest advice—not just a sales pitch.
Final Thoughts
An LLC can offer protection, but it’s not a magic bullet. In some cases, it might even put you at greater risk than if you ran your business as a sole proprietor.
Think carefully, do your research, and make the best choice for your specific situation!
