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What are the potential drawbacks of an LLC?

On Behalf of | Feb 8, 2023 | Business Formation

As a first-time business owner, you likely want to weigh your pros and cons when it comes to any type of business model.

While LLCs enjoy a largely positive reputation, especially for newcomers to business-running, it still has potential downsides as well.

Dealing with taxes

Nerdwallet discusses the potential drawbacks associated with LLCs. The first comes in the form of taxes.

Filing self-employment taxes is different from filing a regular W-2 form given from a place of employment. It takes some adjusting to get used to it, especially because people paying self-employment taxes also have a responsibility to pay Medicare and Social Security taxes.

Dissolving an LLC

On top of that, it is not easy for an LLC if a member leaves. Whether through death, bankruptcy or simply the choice of an individual to exist the LLC, the LLC itself must get dissolved after the loss of a member.

Not only that, but the remaining members must shoulder the costs associated with dissolving the LLC. While it is still possible to do business together, the remaining members must then form a new LLC, along with the associated fees and troubles with setting an LLC up.

No perfect asset protection

Finally, even an LLC has limits regarding its power to protect a person’s assets. Typically, a business owner loses the protections of an LLC if they do not do a good enough job at keeping their business and personal expenses separate. If a business engages in fraud that causes financial loss, the asset protection also ends.

These are important factors to keep in mind when making a decision regarding business formations.