Pros and Cons of Limited Liability Companies

When you are selecting a legal entity for your start-up company, it is imperative that you understand the advantages and disadvantages associated with each option. Many small business owners incorporate as a limited liability company (LLC). Below are a few of the pros and cons of a LLC:


  • You can have an unlimited number of members in a LLC
  • Profits and losses of the LLC can be disproportionately distributed to the LLC members. In fact, members can receive profits and write-off losses in amounts exceeding their ownership percentages.
  • The LLC provides the members limited liability, which means they are protected from personal liability from the LLC’s creditors
  • Managing members’ are considered active owners and therefore entitled to “fringe benefit” treatment. The managing members’ portion of bottom-line profit can be considered earned income.
  • Limited (passive) members of the LLC do not pay self-employment tax on their share of the bottom-line profit because it is not considered earned income.
  • Members can be paid by distributions or by guarantee payments.
  • Corporations are allowed to be members of a LLC, which can provide an extra level of ownership and protection from liability.
  • The LLC can continue to exist if a member dies and the remaining members vote to continue the business.


  • A member’s pro-rata share of the LLC’s profits can be treated as taxable income.
  • A managing member must pay self-employment tax on his or her share of the bottom-line profit.
  • Limited (passive) members are inactive owners, so they do not qualify for “fringe benefit” tax treatment.
  • Some jurisdictions will not allow certain professions to operate as an LLC.
  • The LLC is not a good option for owners wishing to accumulate a significant number of investors or eventually make a public offering.

The above list is not exhaustive, so to learn more, contact us for an appointment. An experienced attorney at Nielsen Law Group is available to help with all your business matters. You can schedule your initial consultation by calling (480) 888-7111 or submitting a web request here.