Although there are advantages to forming an LLC, such as the limited liability and LLC tax, there are also several disadvantages. There is limited legislation that governs the rules and regulations of owning and operating an LLC, unlike the statutory requirements for corporations. This is why members of this type of business will have to create an LLC agreement. An LLC agreement will detail the rights and responsibilities of each of the members, as well as how much of a portion they will all own. Not all states require an LLC agreement, which is why some people will not create one.
However, it is very beneficial to have an LLC agreement to avoid any controversy that could result when members disagree. An LLC agreement should also specify what will happen when a member dies or desires to sell his or her interest in the company. Unlike corporations, an LLC does not have stock, which can make this process more complicated. If this issue is addressed within the LLC agreement, then the members will know what is to happen in advance.
An LLC tax may also be more complicated than corporation taxes. Due to the fact that LLCs offer their members limited liability, many states require an additional LLC tax, called a franchise tax or capital values tax. This means that the state will require the members to pay a fee in order to enjoy the benefits of limited liability. This does not exist in corporations, since they do not offer limited liability.
Depending on the jurisdiction, this franchise tax can be based on the LLC's revenue and profits, or a flat fee. One of the main advantages of operating an LLC is that LLC tax will generally allow for pass through taxation. However, members should be aware that there are certain jurisdictions that will limit this. This can also be a disadvantage when an LLC deals with international companies. Some countries do not recognize the way in which LLC tax is levied, and will treat the LLC in the same way as a corporation.
When forming an LLC, there are considerable filing fees. Many states will require that members publish a letter of intent within a local newspaper stating that they are forming an LLC. If the business is located in a very populated area, like a large city, then the cost for publication can be very expensive.
The structure of LLCs are usually very flexible, because they are not required to have a Board of Directors or annual meetings. This can be both an advantage and a disadvantage. Many times LLCs will not have a standard way of operating, which can create confusion and poor management. This is another area in which an LLC agreement is very beneficial.
It will outline who will be in charge of the day to day operations of the company, and who will have the final say in making important decisions. The LLC agreement will also give the necessary titles to its members, such as "executive" or "manager". This is important because, due to the lack of rigid structure, there can be some confusion as to who will fulfill what roles.