Disadvantages of LLC: Don't Believe All The Hype in 2022

now this is probably one of the biggest reasons why you don't need an llc okay because if you're not aware of this then you could be working hard for months headed in the right direction only to get to your big close and realize that your llc has filled you as an accountant i get asked all the time hey sean what should my business entity be i heard that llcs are the way to go well the truth is sometimes you need a llc and guys sometimes you don't so in this video i want to set the record straight eliminate some of the confusion and break down who needs an llc and who does it let's get into it now i got five or six reasons why you don't need a llc and some of the things you may already know and there will likely be some things that you have no idea about so what i'm gonna do is time stamp in this video so you can skip to the part that you need to learn the most about okay so let's go ahead and dive in for the people who are new and start with what is an llc so an llc stands for a limited liability company okay essentially it is a business entity that you can set up for your business now it is so popular because of the limited liability part you see with an llc you are able to separate your business assets from your personal assets so if someone sues your business and you lose that lawsuit then the only thing that that person can go after are the assets within your business meanwhile your personal assets are completely safe so it gives you this sense of security knowing that you have a legal shield hey sean look i can shield myself from meteors out of space [Music] okay not that kind of shield but it sounds great right so let's go ahead and dive into some of the obvious reasons why an llc still may not be a good fit all right number one people who don't have assets may not need an llc so of course if you don't have a lot of personal assets then a limited liability company essentially does nothing for you for example okay if you are a homeowner and your home is majority paid off then your llc can offer you some protection if somebody were to sue you and go after your home but if you don't own a home then there's no need to protect it same thing for a car if you own a car and it is not close to being paid off then you likely don't need to protect it the good news is that if you start gaining some personal assets then you can always create an llc in the future but instead what i see a lot of people doing is they jump straight in to get an llc very early without even considering what assets they're trying to protect and this is especially important if you're young and you're just starting out in business and you don't have many personal assets that you actually own like a home or car or something like that let's say you're a college student or you're fresh out of college and you're looking to build yourself up and loc likely is not the best option for you and setting up an llc can be costly if you do it the right way and you also have to pay annual registration fees which is something that you don't have to do if for example you have a sole proprietorship or a regular partnership which leads me to my second reason why people may not need a loc number two people who don't make money may not need an llc this one is another no-brainer but you guys get so excited that i have to bring it up okay just because you set up an llc does not mean your business is going to make money right in fact as i've mentioned you actually have to pay to start and operate at llc so it takes money from you but sometimes i see that when people get an llc they get super excited because they can finally feel and say that they're official they start telling everyone hey look i just got my articles of incorporation and now i'm an llc and i'm ready for business but the truth is is that that is just the start of a new challenging journey and as we all know entrepreneurship can be extremely difficult in fact something like 9 out of 10 businesses fell after their first five years now i'm not saying that to discourage anyone in fact i love to see people start new businesses but i'm saying this with love okay so you can approach starting a business with the right mindset anyway the point here is that you should try to prove your revenue model and make sure that you will be able to make money before rushing into starting an llc because you can still prove your business concept while being a sole proprietorship or being in a normal partnership and think about it if you're not making money then there's a high percentage i would guess like 99 of the time you're not going to get into any legal troubles right i mean usually you would need a customer or a client that you're actually responsible for in a legal sense for an llc to even be necessary and if you're not making money then you probably don't need protection which is a great segue into my third reason number three people who have no legal responsibility may not need an llc if you are a business and you make people sign a contract and in that contract you specify that you have no legal liability and the nature of your business carries very very small risk of legal liability then you may not even need an llc let's remember that a limited liability company protects you in a legal sense that's the most popular advantage of a limited liability company or llc however for example if you are a remote or virtual coach and you are just teaching people generally ordinary things like how to speak a new language then more than likely you're not gonna have a lot of legal risks your worst outcome is likely you don't teach them correctly right but the chances are probably close to zero that your business will get sued and they will take all of your personal assets right like the more likely scenario is that your customer ends up really mad and walks away or maybe they're mad enough to go out and write a bad review or maybe they try to take you to court and the judge looks at your case and says this is a complete waste of time right now of course if you have like a physical store then you would be exempt from this because there are some responsibility of taking care of people while they're on your property or for example if you own a restaurant then you're likely responsible for the food that people are eating and digesting into their body so i would suggest that you check with your federal and state laws to see what your business and the nature of your business may be liable for a good place to start will be looking at the ftc which is the fair trade commission's regulations and then look at what consumer and business protections that they have that you need to abide by and even if you have an llc this is still a good idea because you want to protect your business from a devastating lawsuit as well i mean forget about your personal assets for just a second if you build a big business the last thing you want to do is lose your business to a lawsuit so i just think that more people need to pay attention overall to the legal risks within their business and not just worry about their personal risk because if you're like me your business is likely a huge chunk of your income because for most entrepreneurs their business income and their business assets actually outweigh their personal and if you're only thinking about protecting your personal assets think about that for a second do you really believe that you can build a big business because if you did then you would think about protecting your business overall because you know how critical that is to your income and your assets so yes think about your legal risks overall and then also think about what your nature of your business is and if you have assets that need to be protected oh and by the way if you're new here welcome to the channel i'm shawn with life accounting the accounting firm that saves people from high taxes and low profits if you're enjoying the video so far then please take one half of a second to hit the like button below it really helps us to reach more people like you who also want to learn about business finance and accounting and i know there's a lot of llc owners out there that may not like what i have to say so i'm hoping this video still gets some likes because i just want to bring an equilibrium to the conversation and make sure everyone is considering all the possibilities because everyone talks about the pros a few people take the time to break down the cons so i hope that you're appreciating this at the very least all right let's move on to number four people who want to raise money from investors may not need an llc now this is probably one of the biggest reasons why you don't need an llc okay because if you're not aware of this then you could be working hard for months headed in the right direction only to get to your big close and realize that your llc has failed you because an llc can make it very difficult in some cases literally impossible for investors to give you money all right let's quickly look at two reasons why some investors such as venture capital funds literally cannot invest into pass-through entities like an llc because they have tax exempt partners and those partners do not want to receive active trade or business income because it will mess up their tax exempt status that's why when you look closely you will see many tech companies who are trying to raise a lot of venture capital being advised to be incorporated as a c corporation by many accelerator programs so basically in order to limit severe tax outcomes many investors will not invest into an llc so if you have a really big idea and you already know without question that you're gonna need to raise some money to make it happen then think twice or three times before starting an llc the second reason is that llcs make it difficult to raise money due to common investor practices this is a big one okay you see many investors are less familiar with llcs than they are with corporations so they usually have to spend more time on due diligence than actually deciding whether or not they want to invest into your company this means the investor will have an increase in due diligence cost if the investor were to hire an attorney for example and on top of that it just wastes valuable time and most investors want to move fast when they're looking at a startup they want to invest they want to acquire stock and they don't want any tax implications until they decide to sell said stock so the average big investor thinks about buying shares of a private company like they would buying shares of a public company on the stock market they want to find something that they love make a quick and easy investment and then look for their next deal unfortunately llcs make this process much more complicated let's imagine for a second you're at a networking event and you meet an investor who can help grow your business yeah nice to meet you so what do you do oh you know i'm just an investor oh cool i helped run a small accounting firm really that's just the type of investment we've been looking for we can invest one million dollars and help your business grow ten times how is your business structured really okay yeah that sounds great we're structured as an llc oh okay never mind see the investor knows he's gonna have to go through due diligence maybe hire an attorney and then spend his own personal time just trying to figure out how to make the right investment into the llc instead of taking that million dollars and giving it to another accounting firm who was likely structured and ready for an investment now another huge huge huge reason why people who are raising money are disadvantaged by llc are the tax implications for you as an llc owner so let's say you do happen to get a really committed investor they love your business and they're willing to invest through the llc despite all the complications then what will happen is that you need to give them a share of your company when this happens the shares that you sell in your loc are taxed yes they are tax okay it's kind of like when you sell your home and you make some profit after a certain threshold and you have to pay taxes on it now some other entities can use what is known as section 1202 gain exclusion which is a tax code that allows founders and investors to exclude up to 10 million dollars in capital gains from the sale of qualified small business stock or shares and the stock of most startups qualify as a small business stock okay so this is huge and unfortunately section 1202 cannot be used to exclude gains from the sale of interest in llcs or other pass-through entities it's also important to note that other business types like restaurants are also not eligible for section 1202 so you may want to do some research if you're looking to raise the money and don't want to be affected by these capital gains now you may be thinking okay sean but uh i really don't want to raise any money i don't want any debt on my business and i don't really want to worry about any of this but the thing i want to ask you is how committed are you to not raising money if an investor wanted to give you money right now would you 100 say no never ever and if you will then maybe an llc will work out for you now if someone you know is considering starting a business and they need investors please share this part of the video with them so they structure their llc the right way and they make a successful pitch to investors now the last and fifth reason why you may not need an llc is that you may end up paying less taxes with another entity like an s corporation this again is only gonna apply to your business if you're already making money but once you start making over a hundred thousand dollars in revenue from your business then the circumstances may shift to where you pay yourself a reasonable salary to get inside a lower tax bracket then you can take a distribution from your s corporation later which could end up reducing your overall tax liability now if all this sounds a little bit confusing you're not alone okay i could break down all the math in this video but i think crystal did an amazing job in her video about llcs versus s corporations which i highly recommend you watch if you are making money and you want to pay less in taxes like everybody so i'll link her video up above here and in the description below or maybe i'll forget right like we do these videos completely for free so don't get on me too much if i forget to put the link in the description plus you can easily find the video by just going to the search bar on youtube and searching for loc versus s corporations and then clicking on the life accounting video her video will give you absolutely everything you need to know completely for free so in summary all things being considered i still believe llcs are a powerful entity and very popular for many reasons and it more than likely will work for the majority of people out there but as you can tell by listening to this entire video it definitely is not a good fit for everyone so just keep in mind some of the pros and cons of an llc when you're getting started if you enjoyed this video then please subscribe because we drop new videos every week and again hit that like button somewhere over here to support our channel because i know there's going to be a lot of haters out here who don't really take the time to watch this video and immediately dislike it because i pointed out some things that an llc may not be best at anyway that's it for now as always thank you so so much for watching i'm shawn and i'll see you in my next video [Music] you

Channel: LYFE Accounting

Views: 207,088

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Id: YIeHSDbS63o

Length: 15min 59sec (959 seconds)

Published: Thu Mar 25 2021