LLC Advantages Disadvantages



LLC Advantages and Disadvantages



LLC Advantages Disadvantages - The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.

The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.

LLC Advantages Disadvantages

LLC AdvantagesA limited liability company (LLC) has many advantages as a form of business entity:

  • Pass through taxation - under the default tax classification, profits taxed at the member level, not at the LLC level - no double taxation.


  • Limited liability - the members (owners) of the LLC, are protected from liability for acts and debts of the LLC.


  • An LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing the correct option for your business.


  • Can be set up with just one natural person involved or, in some states, one owner which may be an business itself.

  • No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct).


  • No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board).


  • LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death.


  • Much less administrative work and recordkeeping.


  • Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest.

LLC Disadvantages

  • Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a salary to the shareholders working in the LLC, can be passed through as distributions of profits and are not subject to self-employment taxes.


  • Since an LLC is considered a partnership for Federal income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.


  • If more than 35% of losses can be allocated to nonmanagers, the LLC may lose its ability to use the cash method of accounting.


  • An LLC which is treated as a partnership cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.


  • There is a lack of uniformity among LLC statutes. Businesses that operate in more than one state may not receive consistent treatment.


  • In order to be treated as a partnership, an LLC must have at least two members. An S corp can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation.


  • Some states do not tax partnerships but do tax LLCs.


  • Minority discounts for estate planning purposes may be lower in a limited liability company than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets. Some experts believe that LLC discounts may only be 15% compared to 25% to 40% for a closely-held corporation.


  • Conversion of an existing business to LLC status could result in tax recognition on appreciated assets



Professional Limited Liability Company

LLC Advantages
  • Same advantages as a regular limited liability company
  • Gives state-licensed professionals a way to enjoy those advantages
LLC Disadvantages
  • Same as for a regular limited liability company
  • Members must all belong to the same profession




Limited Liability Partnership

LLC Advantages
  • Mostly of interest to partners in old-line professions such as law, medicine, and accounting
  • Owners (partners) aren't personally liable for the malpractice of other partners
  • Owners report their share of profit or loss on their personal tax returns
LLC Disadvantages
  • Unlike a limited liability company or a professional limited liability company, owners (partners) remain personally liable for many types of obligations owed to business creditors, lenders, and landlords
  • Not available in all states
  • Often limited to a short list of professions.




LLC Advantages Disadvantages
| Business Partnerships| S Corp vs C Corp| Sub S Corporations| LLCs Listed by State
| Business Deductions| LLC vs S Corp | CORP vs Part/Sole Part | LLCs Taxes
| Business Formation | ICs and IRS | Piercing the Corporate Veil | How to Incorporate
| Delaware Corporation | Corporations Listed by States | S Corporations Listed by States


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