A Business-First Approach To The Practice Of Law

What are the potential cons of an LLC?

On Behalf of | Apr 30, 2022 | Business Law |

When going through options for creating a business, the first thing you need to do is decide what you want the model itself to look like.

LLCs remain a popular option, especially for new business owners or people who want smaller businesses. However, they do have some potential hurdles and negative points that may not work for every business owner.

Is it actually limited liability?

Nerdwallet discusses the upsides and downsides of an LLC. Looking at the upsides before revealed many of them to lie in the limited liability aspect of an LLC, or the looser system of organization available.

However, one of the biggest downsides is the fact that limited liability is not actually limitless. A judge may in fact rule that an LLC structure does not protect a business owner’s personal interests in some cases. This is a move known as “piercing the corporate veil”. On the plus side, this generally only applies to people who run their businesses in fraudulent ways, cause other people losses, or do not have a distinct separation between their business and personal expenses.

Potential tax issues

Self-employment taxation also proves an issue for some. As the IRS considers LLCs as memberships, all members of an LLC hold personal responsibility for their Medicare and Social Security taxes. These self-employment taxes get based on the total net earnings of the business.

Issues due to membership turnover

Additionally, membership turnover comes with consequences. If a member dies, goes bankrupt or leaves the company, the LLC must get dissolved. The remaining members must start a new LLC from scratch while paying for the financial obligations and remaining legal fees from the last LLC.

Together, these may prove a strong financial hurdle to overcome and may dissuade some from choosing this option.