Limited Liability Company Limitations

Business owners should be aware of several certain disadvantages that may exclude the LLC from consideration as an appropriate organizational entity:

• Numerous states require two or more members to form a limited liability company, so it is not always a valid entity for a sole proprietor. A well-crafted grantor trust could serve as a second member for the LLC, which would satisfy the requirement of certain states and would also reinforce the limited liability aspect of the LLC, as we have discussed earlier. Any income paid to the trust would be reported on its owner's Schedule C detail of a 1040 income tax return.
• Many states do not permit physicians, attorneys and other professionals to form a LLC, so ensure that your business activity is permissible under the laws of the state you wish to form a LLC.
• An LLC may not be useful for reducing estate tax in which case a family limited partnership may be more appropriate if you wish to achieve a discounted valuation on your estate. It is possible for a LP to own one or more LLCs, which can be a successful approach to capture the estate tax discounted valuation.
• You may require the unanimous vote by all LLC members to continue the LLC after the death, bankruptcy or retirement of a member. To avoid a situation where one remaining becomes a holdout and makes unreasonable demands on the remaining members to vote to continue the LLC, you design the LLC operating agreement to require only a majority vote to continue the LLC.

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