They’re an excellent, but not flawless choice.
Frequently, we encounter aspiring entrepreneurs who are eager to create the legal structure for their new business. These individuals have varying business concepts and models, but they share a common thought process: Before any consultation with an attorney, they want to form a limited liability company (LLC).
If proper tax elections are considered and, if necessary, made, the LLC is an excellent choice, but there are specific disadvantages it has that other business forms or combinations thereof do not. Using Kansas and Missouri law as a guide, this article will list and explain four of these specific disadvantages.
Certain Types of Businesses Are Ineligible to Be Formed as LLCs
Imagine forming an LLC, commencing business, and then learning—most likely in an unfortunate, unexpected manner—that your new business was illegally formed. That nightmare could absolutely happen. In Kansas, the businesses of granting policies of insurance, assuming insurance risks and banking are statutorily prohibited from being formed as LLCs. To the contrary, Missouri does not have such prohibitions.
LLCs Can Limit How Some Professionals May Collaborate
Every new business needs, in close proximity, at least four types of service professionals: lawyer, accountant, insurance agent and banker. Do you ever wonder why you can’t consult with all of these professionals working together as a single business entity?
In Kansas, generally speaking, the association of professionals within a single LLC limits their practice to one profession. There are exceptions for professional services rendered ancillary to primary ones, as well as for two or more specific, statutorily allowed combinations of services, but these exceptions are narrow and should be pursued with caution.
For the same reason that a person won’t find these traditional service professionals honing their crafts together, entrepreneurs forming an LLC in Kansas would face constraints as to how its disparate professionals could collaborate.
The law in Missouri concerning various types of professionals associating together within a single LLC is less clear; notwithstanding, other Missouri business laws, the essence of which carries over to LLCs, hold that the combination of professional services rendered within a single business entity is lawful only to the extent that it is expressly permitted by the licensing authorities that regulate each of such professions.
Sales of LLC Interests Can Be Cumbersome
After the formation of an LLC, becoming a new member (owner) of one poses potential challenges. Unless otherwise provided by an LLC’s operating agreement (the internal, governing document of the entity) a person cannot be admitted as a member of an LLC unless the consent of all the existing members is given.
What if you, as a person wanting to become an owner of a prosperous LLC, are blackballed by merely one member of an outstanding dozen? You would be forced to consider a new business. On the other side of that dilemma, you could be frustrated by one of your co-members failing to consent to the admission of a viable new member.
Lack of Judicial Precedent Makes for Legal Uncertainty
Compared to other business laws, such as the laws concerning partnerships and corporations, laws concerning LLCs, especially with respect to their judicial interpretation, are relatively undeveloped. For that reason, entrepreneurs who form LLCs may lack sufficient guidance for how to navigate certain disputes without proceeding to court.
This is because our court system is founded in large part upon the concept of stare decisis, which means that a court will generally follow how it previously ruled with respect to the same issue. This concept affords parties predictability as to the outcome of their disputes. With Kansas and Missouri case law concerning LLCs dating back to 1990 and 1993 respectively, Kansas and Missouri courts have yet to decide an untold number of unique cases and controversies.
A limited liability company is an excellent choice of entity for an entrepreneur, especially if tax elections are taken into account. However, it is not universally the best choice. Rather than rushing to form an LLC, fledgling entrepreneurs should seek professional advice to determine whether an LLC is the appropriate legal entity for their intended purpose or whether another form of entity should be utilized instead.
