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Disadvantages of LLCs

To file as a partnership, an LLC must have at least two members, in contrast to an S corporation that can have a single shareholder. Although all states allow single-member LLCs, the business is not allowed to file as a partnership for federal tax purposes. A single-member LLC owned by an individual files Schedule C as a sole proprietor unless it elects to be taxed as a corporation

Owners cannot be paid as employees but must be compensated for services via guaranteed payments that are subject to SE tax.

Since owners are not employees, they cannot participate in some employee benefit programs such as Section 125 plans, group-term life insurance, disability insurance and meal and lodging arrangements

State law may limit the life of the LLC.

As a partnership, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes

If more than 35% of losses can be allocated to nonmanagers, the LLC may lose its ability to use the cash method of accounting. [IRC 1256(e)(3)]

LLCs cannot take advantage of incentive stock options, engage in tax-free reorganizations or issue Section 1244 stock

Lack of uniformity in LLC statutes. Businesses that operate in more than one state may not receive consistent treatment.

Some states do not tax partnerships, but they do tax LLCs

Minority discounts for estate planning purposes may be lower in an LLC than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets.

Conversion of an existing business to LLC status could result in tax recognition on appreciated assets
The choice of business is very important in order to have a right entity which would provide all your needs in operating your business and saving your earned money from over taxation. Contact our office for more information of other types of entities and their advantages and disadvantages.