Disadvantages of a Limited Liability Company
At first glance, it might seem as though limited liability companies (LLCs) offer the best of both worlds. They are easy to create, yet they allow those involved in the company to protect their personal assets in the event of a lawsuit. However, LLCs also offer their own challenges and a few disadvantages. While these can be overcome, they are worth noting if you're considering forming an LLC.
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Considerations
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In most businesses, acquiring enough capital to truly make a difference and get a good start is a prime concern. Some investors might not be as willing to invest in LLCs as they are in other companies, because LLCs are still relatively new entities and investors tend to stick with things that are familiar. While this can be overcome, it might require a consistent educational outreach strategy on your part.
Types
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What is allowed as an LLC in one state might not be allowed in another (see Resources). This can be a problem if you are planning to operate branches or offices in multiple states. In such cases, a conflict in the laws of the states could lead to significant legal problems. To avoid this, it might be better to move forward with a traditional C corporation or S corporation.
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Taxes
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Some states also impose different taxes on LLCs than they do on other businesses. For example, Delaware imposes a flat fee on LLCs that are not imposed on sole proprietorships. Still, many consider it a bargain to trade a few extra dollars in taxes to enjoy limited liability.
Legal Issues
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If you're starting an LLC, you might have more expensive legal bills, because many lawyers have template agreements drawn up for C corporations and S corporations. All that's needed is to fill in a few details and personalize it to the company in question. LLC drafts may have to be prepared from scratch because they are newer types of companies, and this can take up more of the lawyer's time and cost you more money.
Complexity
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To start a sole proprietorship, all you need is a product or service and a customer. To start an LLC, you likely will need to file Articles of Organization with the agency in your state that's responsible for these types of registrations, typically the Secretary of State's office. This is easier than starting a corporation, but it can seem complicated if you have never done it before.
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References
Resources
- Photo Credit akeg: flickr.com
