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What Disadvantages Does a Limited Liability Company Have?

A Limited Liability Company (LLC) is a form of company ownership popular with small and medium-size business owners in many countries. The name of the company ownership type highlights its main advantage: the liability of the company owners is limited by their contributions to the charter capital. In addition to that, an LLC is comparatively easy to manage and some tax incentives are available to LLCs in some countries.

LLC

The advantages of registering an LLC are numerous but you will seldom hear about the disadvantages of an LLC. Below we discuss this issue in detail. Before we go on, however, we would like to note that much is going to depend on the country where the LLC is registered. Every national state will have its own taxation system and apply its own restrictions to Limited Liability Companies registered on its territory.

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Register an LLC in Europe, the USA, Asia, or an offshore jurisdiction. We provide turnkey solutions to entrepreneurs wishing to start foreign companies. We will gladly assist you in registering a company abroad, setting up a corporate bank account, and we will provide administrative and fiscal support to your foreign business venture.

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What is a Limited Liability Company?

A Limited Liability Company is a business venture subject to pass-through taxation. The LLC founders are not liable for the company debts by their personal property. Similarly to a corporation, an LLC is a legal entity that is separate from its owners.

Pass-through taxation means that the LLC is not taxed at the entity level. Instead, all profits (and losses) are passed to the company owners who pay taxes as private individuals. However, in some countries such as the USA, for example, multiple-owner LLC may have to file tax returns. This means that their owners have to file two tax returns: a corporate one and a personal one.  

Advantages of an LLC

Before we go on to the limited liability company disadvantages, we would like to make a straightforward claim: LLCs have more advantages than disadvantages. The main advantages of registering an LLC include the following ones:

  • Limited liabilities of the company owners: an LLC owner is not responsible for the debts of the company nor for the debts made by his/ her fellow LLC owners. 
  • Flexibility of the company structure: natural persons or legal entities such as partnerships or trusts, for example, can be the founders of an LLC.
  • Flexibility in company management: the LLC can be managed by its founders or by a group of external managers:
    • The LLC can be under total control of the founders if they manage the company themselves;
    • If an external manager is hired, the scope of his/ her authority can be outlined in the job agreement;
    • A hybrid company management structure is also available when one part of the management duties lies with the LLC founder(s) and another part of the duties lies with the external manager(s).
  • Pass-through taxation: this is one of the key advantages of registering an LLC, as the taxes are not paid at two levels (which is the case with a corporation, for example). The company is not normally taxable: only the company owners are taxed on their income in accordance with the tax rates applied in their countries of residence. 
  • Higher level of trust on the part of potential business collaborates, which brings more opportunities for international business extension. An LLC is a legal entity that enjoys a higher level of trust in comparison to a sole proprietor, for instance.
  • Comparatively simple company administration: there are not too many or too strict requirements to LLCs as far as record keeping, reporting, accounting, or audit are concerned (as compared to corporations, for example).
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Find out more about what an LLC is and where you can register one. We will be happy to consult you on the matter. 

What are the disadvantages of an LLC?

This form of company ownership also has certain disadvantages. They can hardly be regarded as serious disadvantages but you have to take some aspects into account if you would like to register a Limited Liability Company in a foreign country.

  • The cost of company registration: the cost of establishing an LLC is higher than the cost of registering a sole proprietorship or a partnership. The registration fee is higher and besides, some costs may be involved in extending the company registration. On the other hand, registering an LLC costs considerably less than creating a corporation or a joint-stock company. 
  • LLCs are not suitable for large-scale business ventures in most cases. It’s fine to use an LLC for small or medium-size business but large businesses often have the form of holding companies. An LLC can successfully be a subsidiary of the holding.
  • Transfer of company ownership rights can be more problematic with an LLC than transfer of ownership rights with a corporation, for example. The shareholder can sell his/ her shares without any trouble while the procedures of transferring the ownership rights have to be clearly defined in the written form when an LLC is created. Otherwise, serious problems may arise if one of the LLC owners wants to quit the business or sell his/ her share of company ownership to somebody else.
  • Tax issues. The fact that LLCs are subject to pass-through taxation is a positive fact. However, some tax issues may still arise for LLC owners:
    • The fact that the company is not taxable, doesn’t mean no tax is due: the LLC owners have to pay the income taxes at the rates applicable in their countries; 
    • Some LLC owners in the USA have to pay a self-employment tax in addition to the income tax. This means that they are taxed twice;
    • If you have an LLC registered in a foreign country and your home country has CFC regulations, you have to report the profits made abroad to your home country’s fiscal authorities. In case there is no agreement on double taxation avoidance between the two countries, you may be taxed twice – at home and abroad.
  • Corporate bank account. To act as a separate legal entity and to enter business contracts, an LLC needs a bank account. Setting up a corporate bank account has always been a more challenging task than setting up a personal account. Offshore Pro Group experts specialize in opening foreign bank accounts both for private individuals and for corporate entities.
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Choosing the right jurisdiction to register an LLC is important because it can help minimize the potential risks. Please consider registering an LLC in Belize or a tax-exempt LLC in Nevis.

How to create an LLC in a foreign country and how much it would cost

Registering an LLC in a foreign country is a much simpler task than registering a corporation. However, you have to do several things and follow certain rules when opening an LLC abroad. The procedure of LLC formation usually includes several steps:

  1. Choose the country/ jurisdiction to register an LLC. The choice of the country will depend on several factors:
    • The country of the LLC founder’s citizenship and tax residence;
    • The geography of the LLC partners and clients;
    • The administrative and maintenance costs that the founder is prepared to incur (the lowest costs are found in offshore jurisdictions);
    • The main goal why the LLC is created: you may use it to engage in active business or to protect your assets. (With the latter goal in mind, you could consider forming an LLC in Nevis.)
  2. Choose the company name for your LLC. In many jurisdictions, you will have to follow some requirements when naming your LLC.
  3. Hire a licensed registration agent in the foreign country where you would like to have an LLC.
  4. Prepare the operational agreement that is the key document outlining the rights and the obligation of the company owners and managers.
  5. Register the LLC, which requires obtaining and certifying some documents:
    • Company Registration Certificate;
    • Company By-Laws;
    • Operational Agreement, etc.
  6. Open a corporate bank account for your LLC. This may be one of the most challenging tasks involved in creating an LLC in a foreign country. The company founders’ country of origin or the types of business activities that the company is going to be engaged in may make the bank officers unhappy. That is to say, banking services may be denied to you in some cases. We can help you solve this potential problem in several ways:
  7. Acquire a taxpayer identification number. This requirement is not applicable in some jurisdictions or it is not obligatory.
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Please note that different countries will have different procedures of registering LLCs there. Besides, the tax obligations and the reporting requirements can also be dissimilar. To avoid making a mistake in choosing the jurisdiction for your LLC, please seek our professional advice on the matter. 

FAQ related to registering a foreign LLC

Who is entitled to create an LLC in a foreign country?

As a rule, there are no restrictions as to the citizenship, residence, or legal status of the person or entity registering an LLC in a foreign country. However, there can be exceptions. In some states of the USA, certain restrictions apply to LLC founders. Besides, troubles may arise if one of the founders comes from the ‘wrong’ country – one that is on the list of uncooperative countries. For instance, Russia, the BVI, and the Marshall Islands have joined the list in 2023.

How is a foreign LLC taxed?

Normally, LLCs are subject to pass-through taxation similarly to partnerships. The profits and the losses that the company makes are reflected in the personal tax returns that the LLC owners file at the end of the fiscal year.

How many people are required to create an LLC?

One person can form an LLC. The maximum number of LLC founders can be limited in some jurisdictions and unlimited in others. You have to bear in mind that special tax obligations may arise if a single person registers an LLC in the USA.

How much does it cost to form a foreign LLC?

The cost of registering a foreign company will depend on the country where the company is registered.

If you would like to register a foreign company that has the smallest number of disadvantages and the biggest number of advantages, please contact us and request a free consultation on the matter!

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