How to Understand the Disadvantages of a Limited Liability Company

Companies that would otherwise start up as a sole proprietorship, partnership or corporation can opt to become a limited liability company (LLC). However, it's essential to understand the disadvantages of the concept before proceeding. Follow these steps to learn more.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Plans for investment
• A lawyer with small-business experience
• Your company's possible liability risk

1. Contact a small-business lawyer, either through the Small Business Administration or a referral (see Resources below).

2. Meet with the lawyer and every member of the company. Ask him to explain the disadvantages of creating a limited liability company.

3. Consider your intentions for the company. If you plan on eventually taking your company public, the disadvantage of an LLC is that potential investors often balk at the business model. They prefer a structure they know and understand, like that of a traditional corporation.

4. Discuss liability issues with your legal representation. Certain businesses are greater risks for lawsuits than others. If personal liability is not an issue, a sole proprietorship or partnership may be a better structure than a limited liability company.

Tips & Warnings

• Before entering your business into any official category, consult a small-business lawyer first. Your attorney can explain the advantages and disadvantages of each type of business structure so that you can make a sound decision.
• The taxes and filing requirements for limited liability companies vary in each state. What may look like an expensive venture in one state may not be in another. As you explore the disadvantages of an LLC, check your own state's requirements.
• If you ultimately choose to form a corporation rather than an LLC so you can go public, don't forget the reporting obligations you then face with the Securities and Exchange Commission.

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