With the popularity of LLCs as a business entity, growing from 17,000 in 1993 to over 2.5 million in 2015, you might think there were no disadvantages. However, there are a few to consider when choosing a business entity for your company.
Changes In Ownership
In some states, if an owner exits the LLC, either by choice or due to due death, the state will require that the LLC be dissolved, and a new entity be created and filed. This is not the case everywhere, so make sure you understand the laws and regulations of the state in which you filed (or intend to file) your LLC.
Liability May Not Be Ironclad
As a new business entity, the strength of the “corporate veil” is still being tested in courts. The protections can weaken if owners have not established or do not follow an Operating Agreement. If the court determines that the LLC is operating as a sole proprietorship, the liability protections may not hold, leaving the owner’s assets at risk.
Cost to Incorporate
The investment to file an LLC varies from state to state. While generally considered an affordable option compared to a C-corporation, for some small business owners, the cost may be a hurdle. According to a 2022 Forbes article, the cost can run from $10 and $800 or more to file annual reports and pay annual fees.
According to Inc.com, because the LLC is a relatively new entity type, the laws governing LLCs are still emerging from court cases, and each state has its own LLC statutes. Fresh court decisions and nuance between states can make the legal interpretations of do’s and don’t’s with LLCs complicated. That’s why it’s worth it to consult with knowledgeable and up-to-date legal and tax advisors.