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Q.What are some of the disadvantages to forming an LLC?
A.There are three primary disadvantages to the LLC, including: (1) the substantial work involved in, and in turn expense of, having a solid written Operating Agreement prepared, (2) the after-formation record keeping requirements, and (3) the uncertainty that comes with relatively new bodies of law.
Most of the beneftis the LLC offers its members stem from the flexibility with whicb the Operating Agreement can be structured. Basic form Operating Agreements often eliminate many of the potential benefits the LLC offers and should therefore be avoided. This is not a do-it-yourself, or paralegal service, project.
In California there are two additional tax-related disadvantages: (1) fringe benefits provided by the LLC to its owner-employees are not deductible; and (2) California’s minimum franchise tax of $800 PLUS a sliding scale amount based on the gross income: $-0- if the gross income is less than $250,000; the top rate presently eceeds $7,000 where the LLC has gross revenues in excess of $5 Million Dollars.
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