Negatives of an LLC

By Anna Assad

A limited liability company structure gives its owners -- the members -- protection against business debts. LLC members don't carry personal liability for company liabilities and enjoy other benefits, such as flexible management arrangement. Although an LLC does have many advantages, you should consider the potential disadvantages before choosing the structure as your business type.

Formalities

A sole proprietorship and general partnership typically don't require many creation or operation formalities. Forming and running an LLC is more work. While a sole proprietorship or general partnership may only need to file a single certificate to form in a state, an LLC may have to draft articles of organization and give out more information about members and business activities. The state may require an LLC have an operating agreement, a document that clearly defines the LLC's inner workings.

Finances

An LLC is a private company funded by its members. Unlike a corporation, an LLC can't issue stock or have business investors who can fund growth. The business may fail or have difficult growing because of lack of operating money. An LLC does not have the same weight or implied creditability as a corporation does as far as business types go. Since an LLC is defined by its members, getting credit may be difficult. Rules vary by bank, but banks usually consider the credit history and scores of the applying members when the LLC is applying for credit. A corporation, on the other hand, can get credit more easily as a business entity.

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Laws and Interest Transfers

An LLC is still considered a newer, unproven business type. State laws regarding LLCs are still evolving and may be vague, lacking or unproven in court. The unclear legal standing of LLCs may make it difficult for a company to engage in business in multiple states. An operating agreement may spell out the specific events that allow a member to transfer his ownership interest to someone else. The member may have to satisfy certain requirements and follow a set of rules. In a corporation, however, a person may simply sell her stock in some cases, without needing permission or meeting specific criteria.

Member Rules

While the LLC's operating agreement governs the company's inner workings in many areas, state laws cover what happens if the operating agreement is insufficient. State law may automatically dissolve an LLC if all members die. If one member dies, leaves or quits, state law may force dissolution of the business. Some states do allow the transfer of the exiting member's interest to other members of the LLC, preserving the company.

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Can an LLC Borrow Money From Individuals?
 

References

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