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Disadvantages Of A Limited Liability Company
Most countries allow different types of typical company structures like sole proprietorship, partnership or corporation. However, the United States allows people to form a limited liability company besides the typical company structures. |
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Although there are many people opening limited liability companies, any lawyer will tell that there are certain disadvantages associated with having a limited liability company. The disadvantages are listed below:
Disadvantage of a Limited Liability Company
- A Limited Liability Company should have at least two members. However, there are some states that allow a single member Limited Liability Company, although the company is not allowed to elect partnership classification for the purpose of federal tax.
- Earnings from a Limited Liability Company are subject to self-employment tax.
- It is quite possible the state law might limit the duration of the Limited Liability Company.
- If the company allocated more than 35% of the losses to non-managers, it may lose its cash accounting method.
- Some states across the U.S. do not tax partnerships but end up taxing Limited Liability Companies.
- A Limited Liability Company gets lower minority discounts for estate planning when compared to a corporation. Invariably, the minority discount is around 15 percent while corporations get between 25 percent and 40 percent.
- If 50 percent or more of the capital and profit interests are sold within a period of 12 months, the Limited Liability Company is terminated for the purpose of federal tax. This is in the case of partnership.
- A Limited Liability Company cannot offer incentive stock options.
- There is no uniformity in the statutes governing Limited Liability Companies across the U.S. This means that if a company operates in more than one state, it could be treated differently in different states.
- If you convert your existing business to a Limited Liability Company, you could incur taxes on the appreciated assets.
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