Overview of Limitations for a Limited Liability Company
There are certain disadvantages that may exclude the LLC from consideration as the best organizational entity:
- 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.
- 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.
- 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.
- 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.