Costs and Maintenance
LLCs can be expensive to form and maintain. The main LLC cost is the state filing fee, which ranges from $40 to $500. Additionally, you have the option to form one yourself or use a service.
Liability Protection and Member Disputes
While LLCs may not offer the liability protection of a corporation, they do protect personal assets from business debts and lawsuits. The control stays with members. However, LLCs can bring about disputes between members, especially regarding operations or profit distribution, which can cause conflict among the involved parties.
Taxation Complexity
Another downside of an LLC is the complexity of taxation. While LLCs prevent double taxation and pass profits and losses to owners who then pay taxes on them, they can choose their tax status but may still face double taxation at both corporate and personal levels. Moreover, members are also responsible for paying self-employment tax.
State Rules and Limitations
States have specific rules regarding the formation and operation of LLCs. Additionally, not every organization can choose to be an LLC.
Hybrid Nature
LLCs are hybrids of corporations and partnerships. Corporations provide limited liability, whereas partnerships offer the benefit of pass-through taxation.