LLC Disadvantages: Everything You Need to Know
There are LLC disadvantages that all new business owners must be aware of. It is best to know all about a specific business structure when making a decision.3 min read
2. Advantages of an LLC
There are LLC disadvantages that all new business owners must be aware of. It is best to know all about a specific business structure, both good and bad, when making a decision on which to choose.
Disadvantages of an LLC
There are some disadvantages of choosing an LLC as a business structure. One of the biggest is that there are some additional administrative needs that must be met when compared to sole proprietorships and partnerships. This extra work is related to the personal liability protections afforded to LLC members.
The following are some additional disadvantages to consider:
- Cost: LLCs are more expensive than partnerships or sole proprietorships. Start-up costs are more than corporations; however, proprietorships and partnerships have nearly zero costs to start.
- Taxes: LLC owners may have to pay unemployment compensation on himself or herself. This would not happen in a sole proprietorship or partnership.
- Banking: Any checks made to an LLC cannot be cashed at all. They will need to be deposited into the LLC’s own bank account. Additionally, some banks charge higher fees for incorporated businesses.
- Separate records: LLC owners have to keep business and personal records separate. LLCs need their own records and should have the minutes of all meetings. All money has to be separated. It is best for a business to maintain separate records, and structuring it is a great way to accomplish that. The profits may be subject to self-employment tax, however. The profits the LLC makes will not be taxed at the corporate level, but they will pass through to members who will have to deal with them on their own personal taxes. These taxes are typically higher than corporate tax.
- LLC members must pay for Medicare and Social Security. It is ideal to speak to an attorney or accountant to get more information.
- LLCs can lose federal tax exempt status if half of the capital and profits are exchanged or sold within 12 months.
- If over 35-percent of losses are allocated to those not in management, the LLC can lose the ability of cash method accounting.
- LLCs treated as partnerships may not utilize incentive stock options.
- LLCs lack a uniformity within their own statutes.
- LLCs that operate in more than one state may not always have the same treatment.
- LLCs must have at least two members to be treated as a partnership.
- S corporations can have only one shareholder.
- All states allow a single-member LLC, but the business may not have partnership classification to deal with federal taxes.
- Sole proprietors file a Schedule C unless it chooses to file taxes as a corporation.
- LLCs have lower minority discounts for estate planning purposes than corporations.
- LLCs are simpler to dissolve, so there is more access to the assets of the business.
- Experts think that LLC discounts are only 15-percent when compared to corporations, which are 25-40-percent.
- There is some confusion about roles in LLCs. Corporations have set roles for all involved in the business. LLCs do not. This can create difficulty for the company and its investors to understand who is in charge of specific areas of the business. This can be eliminated with a LLC Operating Agreement.
- LLCs will cease to exist if a member leaves or passes away. Corporations remain despite who decides to leave it or passes away. This can also be resolved in an Operating Agreement.
- Members are held responsible in they utilize the business to commit fraud or fail to supervise the actions of employees and members when they cause harm.
Advantages of an LLC
You should become familiar with the advantages of LLCs as well. When compared to sole proprietorships and partnerships, LLCs have many advantages. But, it is not always ideal to form an LLC in some cases.
When you compare LLCs to corporations, LLCs are similar since both offer personal liability protection. LLCs also have more flexibility with regard to formalities and taxes. These protections are not afforded to partnerships. The IRS will not consider an LLC to be a different business entity for taxation. The IRS will not directly tax the LLC. Members will get to decide how they want to be taxed.
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