The Disadvantages of an LLC That You May Not Know
- August 25th, 2014
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When you’re trying to decide what type of company you should set up, it’s important to look at each type from all angles. While there are certainly advantages of an LLC, what are the disadvantages of an LLC? Well, there are a few, and you definitely need to be apprised of them before making a final decision about the structure of your new business.
What are the Disadvantages of an LLC?
An LLC’s likeness to partnerships and corporations is easy to see when you look at business partnership advantages and the advantages of C and S Corporations, but their disadvantages are unique to LLCs. Most business types allow for multiple owners, or in the case of LLCs, members, but other structure types allow the companies to stay intact in the event that one of the owners leaves. The liability associated with an LLC isn’t the only limitation this business type faces—an LLC also has a limited life. That means that, more often than not, if a member of the LLC decides to leave, the business must be dissolved, and the remaining partners can start a new LLC together if they choose to do so. Typically, this limitation varies by state, but in some states and in certain circumstances, members can write provisions into their operating agreement to prolong the LLC’s life if a member decides to leave.
The way that an LLC is taxed is, in large part, considered an advantage. However, a disadvantage of an LLC that owners of Corporations don’t face is the requirement to pay self-employment taxes. As an independent entity, a Corporation pays its own taxes, and owners are listed as employees, which means they receive a salary from the company. Because the company is paying the owner a salary, the employment taxes for the owner’s salary are paid by the company, not the owner. An LLC does not function as an independent entity, and both profits and losses are “passed down” to its members. As a result, the members of the LLC are considered self-employed in the eyes of the IRS, and as such they are required to pay the self-employment tax contributions toward Medicare and Social Security.
If you’re starting a new business and want to discuss the advantages and disadvantages of an LLC further, call the tax professionals at JRH & Associates at (516) 794-5752 today!