Although Limited Liability Companies (LLCs) are growing in popularity, there is some dispute as to how effective and appropriate it is to create one in certain situations. As with any initiative in business, putting together an LLC is subject to conditions being appropriate, and if your situation does not meet those conditions – or the conditions change – then just as with any other initiative, it can cease to be the best option. It is therefore worth taking some heed of the potential disadvantages of an LLC, as it is better to be informed beforehand than to receive a crash course after a few months of operation.
Of course many people setting up an LLC will do so for the greater borrowing power it gives their company, including the ability to borrow more and the preferential rates of repayment. Contrary to what some of us may be led to believe however, this is not guaranteed. Certainly at the outset of an LLC’s operations, the lending institution may well consider in the absence of any financial records for the company in this condition that it is necessary to ask the members, or the head of the company to personally guarantee the loan. This automatically cuts off one of the most appealing aspects of operating as an LLC – the liability is not limited to any major degree as far as borrowing is concerned. Shop around for the best deal you can get and actively consider walking away if you cannot get a deal without giving a personal guarantee.
Depending on the state in which you operate you may find that as well as the up front fee for creating the LLC you have some sort of franchise or capital values tax. The calculation of this tax, the frequency with which you must pay it and the name given to it all differ from state to state. As a result, there are some states which make creation of an LLC generally advantageous, while others do a great deal to discourage it. In Delaware the tax is charged as a flat fee, while in other states it may be calculated based on company profits. In others still, it will be charged based on operating revenue. In general, the Delaware method is the most advantageous for a successful company, while the others may give a younger LLC a little more space to operate early on without having to pay money they can ill afford.
Additionally, because of the novelty of the LLC operating methods, different states have different approaches to how they treat an LLC. Some will view it as an ignored entity and simply view the person or people involved in the LLC as being sole proprietor or general partners. This defeats the entire purpose of setting up an LLC, as liability is not limited. The LLC, operated correctly, forms a shield for a company’s members to operate the business according to their vision. If the state sees it differently, then it ceases to have any meaning at all.
Disclaimer: This article is for informational and entertainment purposes only, and should not be construed as legal advice on any subject matter.