Think first before getting into an LLC. While the LLC has become the entity of choice, there are plenty of reasons to avoid them and consider the use of other forms within which to operate. This article will expose and arm you with the 10 best reasons for you to consider avoiding LLC’s.
LLC’s are not unique. When LLC’s first came into vogue about 20 years ago, everyone – attorneys, accountants, bankers, insurance experts – all said that LLC’s would change the business world. In those 20 years I have attended dozens of business seminars related to the type of entity within which to do business. I’ve asked the experts what you can do with an LLC that you couldn’t have done with the already existing entities, such as an S corporation. I have never gotten a good answer
- (continued) to that question, because there is no good answer. Anything you can do with an LLC you can also do with another entity.
- People don’t even know what LLC stands for. I’ve heard experts, even attorneys and accountants refer to limited liability companies as "limited liability corporations." Aren’t all corporations "limited liability?" LLC stand for "limited liability company," by the way.
- LLC terminology is not standard. Owners are "members." The LLC can be "member managed" or "manager managed." An owner can "dissociate" from an LLC. LLC’s don’t have bylaws. The relationship between LLC members is set by state statute that varies greatly from state to state. This creates a formula for mistakes to easily be made when experts advising the LLC use incorrect terminology, thinking the others understand them, when in reality, they are each understanding something different.
- People think LLC’s don’t have to keep records. Since when is it ever good business practice not to keep good records. This thinking just gets people into trouble.
- Non-attorneys set up many of the LLC’s, often making mistakes in the setup. Many states have made LLC setup something that can easily be done online. While that seems to make sense, many untrained people have set up their own LLC’s, thinking that’s all they have to do to enter the business world, not even considering the numerous licenses and permits that may be necessary as well as the way owners relate to each other.
- The 80-20 rule applies to LLC’s in an unusual way. At the point that LLC’s made up 20% of all business enterprises, LLC’s comprised 80% of the business problems I ran into. This came about for a number of reasons, including inconsistent terminology, lack of record keeping and insufficient legal history to rely upon.
- There is insufficient legal history relating to LLC’s. While LLC’s have been around some 20 years, most states have had the corporate form since their inception, going back 200 years or more. Since case law makes up a huge amount of the law related to how an entity operates or how the entity’s owners relate to each other, the huge amount of corporate law definitely gives that type of entity a vast edge over the LLC form.
- You can’t merge an LLC and a corporation without tax problems. Most successful existing entities are corporations. Growth often occurs by way of merger. So if you are likely to some day consider a merger, it helps to be of the same type of entity that you may merge with.
- There are no standard LLC documents. Whereas corporations have pretty standard articles and bylaws, no parallel exists for LLC’s. Nearly every LLC has unique articles of organization and very few have consistent operating agreements. That means that each time a problem comes up, the experts will have to read and understand all the documents relating to the LLC, since there is very little boilerplate.
- LLC’s cost more to maintain than other business entities. While LLC’s may have a very small entry cost, the cost to deal with ongoing operational problems and the fact that they have non-standard documents requires attorneys to spend much more time maintaining LLC clients than other business clients. While that’s good news for attorneys, it is very bad news for owners of LLC’s.
While LLC’s have their place in business, think about the above 10 points before you jump into your next LLC!