What are the potential cons of an LLC?

On Behalf of | May 16, 2022 | Business Formation | 0 comments

When deciding how to build your business, you want to pick the entity that will provide you with most protections and benefits.

Many new business owners opt to form an LLC. However, there are pros and cons to all types of entities. Even a popular one, like an LLC, has flaws that might make it less than ideal for your goals and purposes. Below are three reasons why:

1. Piercing the corporate veil

A recent article by NerdWallet, a popular online platform that provides articles and financial resources to consumers, discusses the potential downsides of an LLC soon-to-be business owners should consider.

An LLC, as the name suggests, provides business owners from limited personal liability. However, the shield on personal liability is not a hard and fast rule. The court may, in fact, rule that your personal assets could be at risk. This is known as piercing the corporate veil.

A court can essentially “pierce” through the shield of your LLC entity and allow creditors to go after your personal assets if, for instance, it determines that the business was established for fraudulent purposes or that you as a business owner comingled your personal and business assets.

2. Membership turnover

Another potential issue soon-to-be business owners should examine when considering an LLC is membership turnover. If a member dies, withdraws or otherwise becomes uninvolved in the company, the remaining members must then dissolve the LLC, pay all closing fees and outstanding debts, and then start a new LLC from the ground up if they wish to continue the business. This can be both costly and cumbersome.

3. Taxes

Lastly, as with all entities, you should consider the tax implications of forming an LLC. The IRS defines LLC members as self-employed. This means that you are responsible for your own taxes. This can serve as a looming hurdle, especially if you have no experience filing and tracking receipts and other financial expenses throughout the year.