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What are the downsides to an LLC?

An LLC is one of the most well-known types of business structures to exist. It has a good reputation as being one of the beginner-friendly forms of structuring a business.

However, all business formations come with both benefits and advantages, as well as potential problems and disadvantages.

Limited personal protections

Nerdwallet discusses the potential negative aspects of LLCs. One of the biggest potential downsides is the fact that even the limited liability protections of an LLC have their limits.

It is possible in certain cases for a judge to determine that personal property does not actually have any protection. This typically happens if a business owner did not do a good enough job of separating their personal and business expenses. Businesses run in a fraudulent way that leads to the financial loss of other people also do not have any protection.

Membership loss

Member turnover can cause quite a problem, too. If a member either dies, goes bankrupt or otherwise chooses to leave the LLC, then the LLC itself must get dissolved. Remaining members have to take on the financial burden of dissolving the business, and if they wish to continue, they will have to register a new LLC.

Handling tax matters

Finally, self-employment tax can serve as a major headache. Members have a personal responsibility to pay Medicare and Social Security taxes based on the net earnings of the business.

For many, these downsides are not enough to outweigh the potential benefits. However, it is still good to consider everything as a whole before making any permanent decisions.