There are certain disadvantages that may exclude the LLC from consideration as the best organizational entity:

1.  The LLC is not always available to the sole proprietor: Several states require two or more members to form a limited liability company.  So, on occasion, a sole proprietor may not be able to form an LLC.  A carefully drafted grantor trust could therefore serve as a second member for the LLC.  An additional benefit to this arrangement is that having a second member would also reinforce the limited liability aspect of the LLC, as we've discussed earlier.  Its income would be reported on the owner's 1040 Schedule C income tax return.

2.  The LLC is not always available for the professional practice: Many states prohibit an LLC for such professionals as physicians and attorneys. Don't form a limited liability company to operate your professional practice before you check with your state licensing agency or an attorney familiar with your state's professional regulations.

3.  Questionable estate tax benefits: The limited liability company may not save you estate taxes.  If you have a taxable estate, then it may be safer to use the family limited partnership if you want a discounted valuation of your estate.  Your limited partnership may, however, own one or more LLCs, which would enable you to capture the estate tax discounted valuation.

4.  The dissolution dilemma: You may also require the unanimous vote by all LLC members to continue the LLC after the death, bankruptcy, retirement, etc.  of one member.  One member can then possibly become a holdout and make unreasonable demands on the remaining members to vote to continue the LLC.  You can avoid this holdout problem if your LLC operating agreement requires only a majority vote to continue the company.

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