Disadvantages of limited liability company (LLC)

The Rules and Guidelines of LLC for conducting business
The LLC, for initiating and conducting the business, has to follow certain rules and guidelines for deriving tax benefits as well as creating a distinction between the entity and its members. Some of the compliance LLC have to make is as follows:

The first step in LLC is the creation of an LLC is that the name of the business must be unique and must file its constitutional documents and articles of operations to the state regulatory office. The formalities shall be made as per the prescribed form and format in the state regulatory office.

For hiring the employees in LLC, the LLC have to apply for an Employer Identification Number which will be a unique number, and such shall be made from the Internal Revenue Service (IRS).

In the filing of income tax, if as a sole proprietor, then LLC shall have to file Form 1040 Schedule C, whereas if filed as a partnership firm or more than one member, then file Form 1065. If the LLC is a corporation, then it should file Form 1120 for disclosing the profit and loss, thereby computing its tax liability.

The IRS allows LLC members to embrace variation in the structure of the business, where it allows affixing letters depending upon profession or service. There is a prevalence of S corporation structure where one member leaves the business without affecting its business structure.

Main Disadvantages of Limited Liability Company (LLC)

The disadvantages of LLC can be summarized as follows:

LLC cannot put provisions in its constitutional documents where there is the prevention of automatic termination of an entity with the owner’s exit because that will violate IRS regulations. So this makes LLC less flexible.

In some situations filing for LLC taxes are trickier than corporate taxes. In many states, LLC is subject to an additional tax called franchise tax, while some states charge fees and some states charge a certain percentage of profit. Therefore, it is imperative to understand which is to be compiled based on the state to state.

The pass-through benefit will not be available to LLC if it is engaged with international companies.

Members of LLC who do not have an active role in the LLC’s management shall not be allowed to have tax benefit from LLC income.

The members who are engaged in LLC are considered self-employed and are charged with Security Welfare related tax. These tax rates are higher than the corporate tax.

There is no incentive/ benefit to reinvest profit for the LLC members.

The filing fees for LLC creation and the Letter of Intent can be quite expensive in some US states.

The LLC does not have any mandatory requirement of conducting meetings within a prescribed time or a certain no of meetings to be held in a year. This relaxation often creates poor management and a lack of professional and operating standards with the LLC structure.

There is compliance with separating the assets of the corporations and the personal assets of the members. For this, separate records need to be maintained.

Legal or Ethical Issues of an LLC
This is an extension of the disadvantages of LLC with a special focus on the following issues:

An issue of liability- These issues touch the legal aspect of initiating an LLC, where there is a clear demarcation of the personal liability and the LLC’s liability. If LLC is sued, the creditor can file for liquidation for the business assets and not the personal assets of the member. However, due to the owner’s negligence or violation of any incorporation procedure, his/her assets may be subject to liability.

Operating Agreement Issues- This is yet another legal issue where the LLC must address legal and ethical issues in the operating agreement. It must include key operating instructions, information about owners and their membership, and pay.