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Frequently Asked Questions

What are the disadvantages of forming a Single-Member Limited Liability Company (SMLLC)?

Forming a Single-Member Limited Liability Company (SMLLC) comes with its own set of disadvantages. One of the main drawbacks is the time-consuming recordkeeping. Proper documentation, including an operating agreement, is crucial for the operation of an SMLLC. Without this document, there is a risk of facing a lawsuit where someone could claim that your company is a sham. In such a case, the judge would require an operating agreement to determine the case, and without it, you might be held liable for business debts. Another significant disadvantage is the lack of liability protection. Some courts have ruled that an SMLLC is not a separate entity and therefore cannot protect the assets of the LLC from creditors. This could potentially put your personal assets at risk. To avoid this, you could consider creating a two-member LLC or setting up a holding or parent company to own your other LLCs. While SMLLCs do offer some tax advantages, they are also subject to self-employment taxes, as SMLLC owners are considered self-employed. This means that they must pay self-employment taxes annually, which can be a significant financial burden.
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