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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References

Related articles

Does an LLC Need a Business Purpose?

A limited liability company (LLC) is a relatively business entity created by state law. LLCs typically have the advantages of both partnerships and corporations when it comes to taxation, management and personal liability. State laws vary with regard to LLCs. Accordingly, some states require that an LLC have a business purpose while others do not. LLCs are for-profit business entities, so even if a state does not require an official business purpose, an LLC should have a business purpose.

Can a Member of an LLC Be Fired?

Managing relationships between owners of a small business can be quite trying at times. In cases of severe disagreement or incompatibility within a limited liability company, firing one or more owners, referred to as members, may be an option. However, generally an LLC may only fire a member when the operating agreement allows it, and if the owner is compensated for his share of the business.

What Makes an LLC Different Than a PLLC?

When forming a new business, particularly if professional in nature, you should understand the difference between Limited Liability Companies and Professional Limited Liability Companies. An LLC is a business entity that is formed under state law. Some states allow for the formation of specialized LLCs, such as a the PLLC. Each state has different restrictions on each business type, and LLCs and PLLCs are not business entities that are available in every state.

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