States charge an initial incorporation fee. Understanding the disadvantages of an LLC is important in determining the right legal entity for your business. The structure of your business will determine how you are taxed, your level of personal liability, and the state and federal regulations you must follow. An LLC (limited liability company) protects the business owner from personal liability while facilitating its establishment.
The personal assets of the LLC owners (called members) are protected from business debts and court judgments. Creditors cannot seize the owner's house, car or other assets to pay the company's debts. This type of protection is not offered by a partnership or sole proprietorship. Note that not having limited liability protection could be much more expensive in the long run than the cost of forming an LLC.
The disadvantage of an LLC is the lack of attractiveness to investors compared to corporations, and a higher cost than owning a sole proprietorship. Raising capital can be a difficult endeavour for an LLC because the company does not have the ability to issue stocks and bonds like a corporation. This means that the company has to rely on contributions from its members to finance its business activities.
A member of the company may have to take out personal loans to secure financing for the company, which means it must have good credit. In addition, an LLC may have to use the company's business assets as collateral to secure business loans. If your LLC is taxed as a partnership, the government considers the members working for the company to be self-employed.
This means that those members are personally liable to pay Social Security and Medicare taxes, collectively known as self-employment tax, based on the total net income of the business. Since you rightly suspect that every business structure has some disadvantages, you want to compare the advantages of LLCs with the disadvantages of LLCs.
