Biggest Disadvantage of an LLC: What You Need to Know Before Registering

Everyone touts the benefits of an LLC—protection from personal debt, flexible management, and that legit-sounding company name. But here’s something a lot of folks don’t realize until it’s too late: the biggest headache often comes from how the government taxes your money. If you’ve heard someone grumbling about their LLC during tax season, there’s a good reason for it.

So what’s the catch? Most new LLC owners get blindsided by self-employment taxes. Yes, the kind that eat into every dollar of your profit, even if the business barely scraped by. Think Social Security and Medicare contributions coming directly out of your earnings—at rates much higher than what you’d pay just working a regular job.

Before you rush to that online registration portal, it’s worth knowing exactly what makes this one problem such a big deal. A lot of folks imagine smooth sailing after forming an LLC, but the tax hit can change how you handle money, plan for growth, and pay yourself. Miss this, and your business’s bottom line might shrink faster than you expect.

• Why LLCs Are So Popular
• The Core Drawback: Self-Employment Taxes
• Digging into the Tax Burden
• Paperwork Surprises & Ongoing Costs
• Case in Point: When the Disadvantage Bites
• Smart Moves Before You Register an LLC

Why LLCs Are So Popular

You see LLCs everywhere because they strike a sweet spot between running a business like a grown-up and skipping a lot of legal headaches. They offer this magic trick called “limited liability,” which protects your own stuff—your house, your savings—if the business tanks or gets sued. It’s a big deal, especially if you’ve got a family to worry about.

Setting up an LLC is way less of a pain than running a corporation. You don’t have to hold stiff board meetings or keep thick binders full of paperwork. For one-person businesses or small partnerships, the rules are flexible. You can run things your way, call your own shots, and still look official.

Here’s what draws people in:

• Easy formation and fewer hoops to jump through. In most states, it takes under an hour and about $100-$300 in fees to start your LLC.
• No need for a board of directors or exhausting annual meetings—just basic paperwork to keep things legit.
• Flexible taxation: By default, profits pass through to your personal tax return. If it works for you, this skips the big “double tax” that hits corporations. But you also get options to choose how your LLC is taxed down the line.
• LLC disadvantages seem minor compared to the benefits when you first glance at the setup—most folks think of LLCs as the smart, simple choice.

Another reason? Banks, clients, and suppliers tend to take LLCs more seriously than sole proprietors. That official company label can open doors and build trust without the corporate hassle.

The Core Drawback: Self-Employment Taxes

Let’s break it down. When you set up an LLC and pick the “default” tax route, the IRS treats you as a sole proprietor (if you’re solo) or a partnership (if you’ve got business partners). Either way, your profits aren’t taxed at the company level—they pass straight to your personal tax return.

Sounds good, right? Here’s where it stings. All that income you make is subject to self-employment taxes. These taxes cover Social Security and Medicare, totaling 15.3%. For regular employees, your employer covers half of that rate; as an LLC owner, you’re on the hook for the full amount yourself. Even if you barely make a profit, you’re still paying, and those payments add up super fast.

For example, imagine your LLC earns $60,000 in profit this year. That means you’ll owe about $9,180 just in self-employment taxes—not counting regular federal and state income tax. This isn’t just a one-time thing, either. LLCs have to deal with this every single year.

If you’re coming from a traditional 9-to-5, it’s a shock. When Cora and I started our side hustle, we thought we’d keep more of what we made. Instead, the self-employment tax bill looked like a car payment every month. That kind of hit can seriously mess up your budgeting and savings plans.

• You owe self-employment tax on all business profits, not just what you take out as pay.
• This tax is separate from federal or state income taxes, not a replacement.
• LLC owners have to pay estimated taxes each quarter to avoid big penalties at tax time.

Lots of people miss this until tax time lands on them like a ton of bricks. It’s not just the amount—it’s the fact that you’re paying both the employee and employer side. This is the reason why self-employment taxes are the single biggest disadvantage of an LLC for so many small business owners.

Digging into the Tax Burden

The sticker shock doesn’t really hit until you actually see the numbers. If you own an LLC and make a profit, most of the time the IRS treats you as self-employed. That means you’re on the hook for self-employment taxes—not just your usual income tax but also Social Security and Medicare. The current self-employment tax rate is 15.3%. That’s a lot higher than the 7.65% a regular employee pays, since when you work for yourself, you have to pay both the employer and employee share.

Here’s where it gets real: even if your profits are low, the percentage applies to every penny the business earns, unless you decide to register as an S-corp (which opens another can of worms). It catches a lot of people off guard, especially those who expected to save money simply by forming an LLC. The math doesn’t lie. If you bring in $80,000 in profit from your LLC, you’d owe $12,240 just in self-employment taxes—before income taxes kick in.

Unlike some corporations who can get away with paying tax just on what they take as salary, LLC profits usually all get taxed, whether you pull the cash out or not. This setup is called pass-through taxation, and it’s meant to be simple. But that simplicity usually means a heavier tax load for small business owners who aren’t expecting it.

Pro tip: The IRS does let you deduct half of that self-employment tax (the “employer” half) from your taxable income. That helps, but don’t expect it to cut your bill in half. And if you have partners, each one gets taxed on their share, which can get messy if one person takes home more than another. It’s something to think about before locking in that LLC structure—especially if you’re planning big profits or working with co-owners who have different financial goals.

Paperwork Surprises & Ongoing Costs

Forming an LLC might look simple on those online ads, but the reality hits after the paperwork piles up. There are forms to file when you open, yearly documents to keep your business legal, and fees that add up faster than you'd think. Seriously, most folks aren't ready for all the little surprises that come with maintaining their LLC.

For starters, every state has its own set of rules when it comes to reporting. Most require you to file something called an Annual Report. Miss these, and you can get fined or even lose your business status. Let’s look at some real examples of recurring state fees for LLCs from 2024:

It doesn’t stop at fees. You’ll need an Operating Agreement—basically, a rulebook for your business—even if your state doesn’t ask for it. Banks ask for it, especially if you want a business account.

Don't forget taxes. Even if you made no money, you usually have to file a return. And if you have employees, throw payroll reports into the mix too.

• Annual/biennial reports
• Registered agent fees (often $100–$300/year)
• State-specific franchise or excise taxes
• Document updates (like changes to membership or address)
• Extra paperwork for out-of-state operations

Keeping up with this “LLC disadvantage” means building habits: regular calendar reminders, keeping digital and paper copies, and maybe even hiring a pro. Even if you’re a solo act, it’s easy to drop the ball when you’re busy running the actual business.

Case in Point: When the Disadvantage Bites

I’ve seen more than a few business buddies get hit hard by self-employment taxes after forming an LLC. Here’s how it usually goes: someone leaves their day job, sets up an LLC, and pulls in, say, $80,000 in profit. They expect to take home a big chunk. Then tax season rolls around and—bam—self-employment tax takes a big bite.

Let’s break down the numbers. For a single-member LLC, all the profit is typically treated as self-employment income. That means for Social Security and Medicare, you’re on the hook for about 15.3%. Compare that to being a regular employee, where your employer covers half. With an LLC, it’s all on you.

The difference stings—over $6,000 more in tax from just this.

Worse, a lot of folks get tripped up because this tax isn’t withheld automatically. You have to make quarterly estimated payments, and if you guess wrong, you can get hit with penalties. If you’re new or your profit jumps, it gets messy fast.

Real talk: this disadvantage really hits small businesses with decent profit, but not enough to justify an S Corp election or fancy tax strategies. And if you’re like me—my spouse, Cora, and I run a side business—you start every year planning how not to give the IRS a surprise bonus.

If you want to LLC disadvantages in plain numbers, that extra tax bill makes a clear case. It’s not just theory; it eats into your take-home pay big time, especially if you’re not expecting it. Be ready and plan ahead, or it’ll bite you too.

Smart Moves Before You Register an LLC

If you’re thinking about forming an LLC, don’t just focus on the good stuff—take a close look at the hidden costs and rules. It’s way cheaper to plan now than to fix mistakes after the papers are signed. Let’s walk through what you should do before you file for an LLC, so you don’t end up with regrets come tax time or when you’re trying to pay yourself.

LLC disadvantages can hit fast if you’re not ready, especially when it comes to taxes and paperwork. Here are some smart steps to take before registering:

• Check your income expectations. If you don’t expect to clear much profit the first year, the self-employment tax might wipe out what little you make. The IRS treats LLCs as pass-through entities by default, meaning all profits show up on your personal tax return—and they get hit by that self-employment tax right away.
• Compare other business structures. For some folks, a simple sole proprietorship or even an S Corporation might actually save more money. S Corps allow certain earnings to be paid out as dividends, avoiding some payroll taxes. If your business has growth potential, don’t skip this comparison.
• Talk to a qualified tax professional. Don’t just rely on online calculators or forums. A quick call with a CPA can save you thousands. As the IRS website says:

“Choosing the right business structure is one of the most important decisions you’ll make as a business owner. It impacts everything from your taxes, to your personal liability, to ongoing paperwork and costs.”

• Factor in state fees and ongoing costs. Many states require annual LLC renewal fees and sometimes extra reporting paperwork—California, for example, charges an $800 minimum franchise tax even if you don’t turn a profit.
• Think about outside investors. LLCs don’t have stock, so if you want to raise money by selling equity, this could be a problem. Investors sometimes favor corporations because it’s easier to transfer shares.
• Plan your accounting system. Make friends with a good bookkeeping app, or hire someone if you’re not into spreadsheets. Mixing business and personal money causes a lot of trouble and can even put your liability protection at risk.

You don’t have to figure it all out overnight, but skipping this prep work can haunt you for a long time. I talked to a friend who went straight online and set up his LLC the same week he got laid off—he spent the next year learning the hard way that paperwork and taxes aren’t just side issues. Take your time, research options, talk to pros, and weigh whether an LLC is the best fit for you right now.