What is the Downsides & Disadvantages of an LLC?
Limited Liability Companies are perhaps the most popular business structure for business owners for various different reasons.
But depending on your business type and how you plan on structuring your management, an LLC may not actually be the best option for you.
Here are some possible downsides and disadvantages of an LLC. But first, lets recap what an LLC is and what it does for you.
What is an LLC?
An LLC (limited liability company) is a simple and flexible business structure that protects your personal assets.
If the business doesn’t do as well as planned or you have a rough year, you as the business owner are personally protected under an LLC.
For example, if your Limited Liability Company declares bankruptcy or is sued, your personal assets such as your vehicle, personal bank accounts, and house are safe.
A Single member LLC is a pass-through entity, which means that profits and losses from the LLC are “passed through” to you and taxed as personal income.
This benefits you because you are not required to pay both corporate and personal taxes on your earnings.
For tax purposes, there are huge benefits for an llc owner.
LLC’s can be owned by more than one person known as LLC “members”.
Multi-member LLC’s are taxed as partnerships and are also pass-through entities.
This means each LLC member pays personal income taxes on their portion of the profit.
There are many reasons why business owners choose to structure their business as an LLC including:
- As mentioned above, your personal assets are protected should your LLC go bankrupt or be sued.
- LLC owners can choose their own management structure.
- They qualify for pass-through taxation – meaning that profits are only taxed once.
- LLC’s have very little restrictions regarding the company’s structure. You decide if you want your business to be a single member LLC, multi-member LLC, and so on.
- LLC’s have flexible profit sharing meaning that you can choose how you want to do your profit sharing. Profits are not required to be equally distributed among members.
What is the downsides to an LLC?
While the benefits of structuring your business as an LLC far outweigh the disadvantages, there are still some disadvantages worth mentioning.
First and foremost, LLCs have more administrative requirements than partnerships or sole proprietorships.
They can also be more expensive to form than partnerships or sole proprietorships and require an active registered agent at all times.
A registered agent is simply a person or entity appointed to accept any official mail or important documents on behalf of an LLC or Corporation.
Registered agents are usually renewed on an annual basis and there is a fee for each renewal.
Another disadvantage to LLCs is that taxes can become a little more complex, depending on the state in which the business is registered.
Some states require an additional capital values or franchise tax that needs to be calculated and paid.
In some states, the fee is simple and is taxed as a flat fee while other states require you to calculate a percent of profits and revenue.
LLC owners are taxed as self-employed so they have to pay Social Security and Medicare taxes themselves.
LLCs that have an international presence may be taxed as corporations and lose the benefit of pass-through taxation.
Lastly, LLC owners must keep detailed records of meeting minutes to make sure that their personal and business assets are completely separate.
All disadvantates aside, LLCs are still the most popular choice for business owners because the benefits outweigh the disadvantages in most cases.
As always, we recommend speaking to a tax professional if you aren’t sure which business structure to choose.
If forming an LLC is the choice for you and your business, checkout our LLC step-by-step guide here.
We hope this article answers the question “What is the downsides to an LLC” thoroughly and helps you make your decision on whether to start one or not.