Can I Start a Business Without an LLC: Liability and Taxes

Yes, you can start a business without forming an LLC. The moment you begin offering goods or services for profit on your own, the law treats you as a sole proprietor by default, with no filing required at the Secretary of State. That keeps startup costs and paperwork low. The trade-off is that nothing legally separates you from the business, so a debt or lawsuit against the business can reach your personal bank account, your car, and potentially your home.¹

What You Are by Default Without an LLC

Skip the entity paperwork and the law fills in a structure for you. If you’re working alone, that structure is a sole proprietorship. It isn’t a separate legal entity — you and the business are one and the same for legal and tax purposes.¹ Freelancers, independent contractors, and people testing a new idea are almost always operating this way, whether they’ve thought about it or not.

If two or more people go into business together for profit, the default flips to a general partnership. This can form without a written agreement and even without anyone realizing it has formed. Courts look at whether the people involved share profits, make joint decisions, and present themselves to the public as partners.² If you’re collaborating with someone on a money-making venture, put the terms in writing. A partnership agreement should cover how profits and losses are split, what happens if someone leaves, and who has authority to take on debt or sign contracts for the business.

The Real Cost: Personal Liability

Unlimited personal liability is the biggest thing you’re accepting when you operate without an LLC. Because a sole proprietorship isn’t a separate legal entity, your business assets and personal assets sit in one pool. If the business can’t pay a debt, a creditor can pursue your personal accounts and property.¹ A contract dispute, a customer injury, or an unpaid supplier bill can all reach your personal finances.

In a general partnership, the exposure gets worse. Each partner carries joint and several liability, meaning any one partner can be held personally responsible for the debts and wrongful acts of the others. If your partner makes a costly mistake in the ordinary course of business, a court can order you to pay for it out of your own pocket, even if you had no involvement.²

Using Insurance in Place of an Entity Shield

Without the legal separation an LLC provides, insurance is your primary tool for keeping personal assets out of reach. A general liability policy covers third-party claims for bodily injury, property damage, and similar incidents tied to your operations. Annual premiums for small businesses generally run from a few hundred dollars to a few thousand, depending on your industry and coverage level.

If you provide advice or professional services, errors and omissions insurance (also called professional liability insurance) covers claims that your work caused a client financial harm, including allegations of negligence, missed deadlines, or inaccurate advice. Neither policy changes the underlying unlimited-liability structure, but they pay covered claims before your personal assets are on the line.

Taxes You Still Owe as a Sole Proprietor

An unincorporated business doesn’t file its own return or pay its own income tax. Profits and losses flow through to your personal return. You report business income and expenses on Schedule C and attach it to your Form 1040; the net profit becomes part of your total taxable income.

Self-Employment Tax

On top of regular income tax, sole proprietors owe self-employment tax to fund Social Security and Medicare. With no employer splitting the contribution, you pay both halves. The combined rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare.³ You calculate it on Schedule SE and file it with your Form 1040.⁴ The Social Security portion applies only to the first $184,500 of net self-employment earnings in 2026;⁵ the Medicare portion has no cap, and an additional 0.9 percent Medicare tax applies to earnings above $200,000 (or $250,000 on a joint return).

Deductions That Take Some of the Sting Out

Two deductions help. You can deduct one-half of your self-employment tax above the line, meaning you get it whether or not you itemize.⁶ Eligible sole proprietors can also claim the qualified business income (QBI) deduction, worth up to 23 percent of qualified business income starting in 2026, when the deduction was made permanent and expanded from the previous 20 percent rate. It phases down for higher earners and may be limited or unavailable for specified service businesses like law, medicine, and consulting once taxable income is high enough.

Quarterly Estimated Payments

No employer withholds tax from a sole proprietor’s income, so you send it in yourself. If you expect to owe at least $1,000 in federal tax after any withholding and refundable credits, you’re generally required to make quarterly payments using Form 1040-ES,⁷ due in April, June, September, and January. You can generally avoid a penalty by paying at least 90 percent of the current year’s tax or 100 percent of last year’s, whichever is less. If your prior-year adjusted gross income exceeded $150,000 ($75,000 if married filing separately), the safe harbor rises to 110 percent of last year’s tax.⁸

Paperwork You Still Can’t Skip

No LLC doesn’t mean no filings. Several requirements apply to any business, and ignoring them can bring fines or shut you down.

Fictitious Business Name (DBA)

Operating under any name other than your full legal name usually triggers a fictitious business name filing, commonly called a DBA. The filing ties your trade name to your legal identity so the public and creditors can figure out who stands behind the business. You typically file with the county clerk; fees generally run $10 to $150. Some jurisdictions also require you to publish the filing in a local newspaper, which adds to the cost.

Business Licenses and Zoning

Many cities and counties require a general business license or tax certificate before you can legally operate. Fees vary widely, but basic licenses often fall between $50 and $150. Certain industries — food service, construction, cosmetology, healthcare — need additional professional licenses with their own costs and renewal schedules.

Planning to work from home? Check your local zoning ordinance first. Some rules broadly permit “customary home-based occupations.” Others restrict signage, customer foot traffic, or how many employees can be on the property. Homeowners in planned communities or condominiums may also face private restrictions (often called CC&Rs) that are stricter than city zoning.

Employer Identification Number

A sole proprietor without employees can use a Social Security number for tax filings. You’ll need an Employer Identification Number (EIN) from the IRS if you hire employees, open certain business bank accounts, or set up a retirement plan for yourself. Applying online through the IRS is free.

Hiring Employees Without an LLC

You don’t need an LLC to hire, but employees bring real obligations. Get an EIN first. Each new hire must complete a W-4 so you can withhold the correct federal income tax.⁹

As the employer, you withhold and remit federal income tax, Social Security tax, and Medicare tax for your workers, and you pay the employer’s share of Social Security and Medicare taxes plus federal unemployment tax (FUTA). Payroll reports are due quarterly and annually, and the IRS requires you to keep employment tax records for at least four years.⁹ Most states also require workers’ compensation insurance, though the threshold (often tied to employee count or industry) varies by state.

When It’s Time to Consider an LLC

Operating without an LLC works well early on. A few situations tip the calculation the other way:

Your work involves physical risks to customers, high-value contracts, or professional advice where errors could cause significant harm.
You’re hiring employees, whose actions on the job can create liability for you.
Revenue is growing to the point where electing S corporation tax treatment through an LLC could reduce earnings subject to self-employment tax.
You’re signing commercial leases or large contracts, where signing personally raises your exposure and where the other side often prefers dealing with a formal entity.
You’re bringing in partners or investors, and want a framework for ownership shares, profit splits, and decision-making authority.

Forming an LLC doesn’t erase every risk. Courts can pierce the veil of an LLC that doesn’t maintain separate finances, keep proper records, or operate as a genuinely independent entity. The protection is strongest when business and personal funds stay in separate accounts, contracts are signed in the business’s name, and the LLC is treated as its own entity in practice.

1
U.S. Small Business Administration. Choose a Business Structure
2
Legal Information Institute. General Partner
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Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax
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Internal Revenue Service. Instructions for Schedule SE (Form 1040)
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Social Security Administration. Contribution and Benefit Base
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Internal Revenue Service. Topic No. 554, Self-Employment Tax
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Internal Revenue Service. 2026 Form 1040-ES
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Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
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U.S. Small Business Administration. Hire and Manage Employees