It’s time to get real about something most startup founders won’t tell you: forming an LLC isn’t always the magic bullet it’s deemed to be.

Sure, “Limited Liability Company” has a nice professional ring to it, right?  Plus, it offers protection from personal liability, flexibility in how you manage things, and fewer legal hoops to jump through compared to a corporation.

It sounds like the perfect setup… until it’s not.

What if we told you that choosing an LLC without fully understanding the fine print can lead to some serious startup regrets.

In fact, some entrepreneurs have found out the hard way that the LLC life isn’t as smooth as they expected.

Want to hear it straight from the horse’s mouth? Tune into our podcast 15 Minute Founder where founders share their real-life LLC stories  —  the good, the bad, and the ugly. It’ll give you a clear picture of why an LLC might not always be the right fit for your business.

But if you are short on time, don’t worry, just scroll through this blog for the key reasons why becoming an LLC might not be all it’s cracked up to be. This guide by doola breaks down the drawbacks, potential regrets, and what to really expect when you choose the LLC route.

And if you want to talk to our experts right away, book a free consultation here.

The LLC Hype — Why Everyone Wants This Set Up

Before we dive into the potential messiness of LLCs, let’s acknowledge why so many startups are drawn to this structure. After all, you’ve likely heard everyone rave about LLCs.

✅ Liability Protection: This is usually the first big selling point. The idea that your personal assets (your house, your car, even your favorite pair of sneakers) are shielded if your business is sued. You get to sleep at night knowing you won’t be forced to sell your prized collectibles because of a lawsuit.

✅ Tax Flexibility: Unlike corporations, LLCs offer some tax flexibility. You can opt to be taxed as a sole proprietor, a partnership, or even as a corporation. It’s like the Choose-Your-Own-Adventure of business structures.

✅ Simplicity: LLCs often require fewer formalities than corporations. No annual meetings, fewer documents, and generally less paperwork.

So far, so good, right? But here’s what no one tells you upfront: with all that flexibility comes a few surprises — and they aren’t always pleasant.

Let’s dig into the side of LLCs that might make you rethink jumping on the bandwagon.

The Downside No One Mentions — LLC Disadvantages

Behind all the polished promises and that sweet flexibility, LLCs come with their fair share of challenges. A lot of entrepreneurs jump in excited, only to find out later that it’s one of their biggest business structure regrets. We’ve even dedicated a whole blog to those mistakes and regrets — check it out here!

But don’t get discouraged, Our goal here is not to rain on your entrepreneurial parade. We just want to make sure you’re not diving headfirst into an LLC setup just because your buddy with a startup did.

Let’s talk about the LLC drawbacks that you probably haven’t come across.

1. Self-Employment Taxes: The Silent Killer of Profits

Let’s start with taxes. LLCs are often marketed as tax-efficient due to their “pass-through” taxation. That sounds like a win until you realize LLC owners must pay self-employment taxes on all of the business’s net earnings.

What’s that, you ask? Well, it’s the lovely 15.3% of your income you owe the IRS — on top of any other taxes you’re already paying.

If you’re bringing in significant revenue, those self-employment taxes add up quickly. Many startups realize too late that the tax bill is much heftier than expected, and suddenly, the grass on the other side — C-corporation territory — looks a whole lot greener. 

Speaking of which, if you’re curious about what that greener grass looks like, check out our detailed guide on different business structures and why an LLC might not be the only game in town.

2. Investment Roadblocks

If you’re planning on attracting venture capital or bringing in angel investors, brace yourself. 

Investors often shy away from LLCs. Why?  Because, it’s complicated — literally. 

LLCs don’t have stock options, making it harder to offer shares to investors. Plus, most VC firms are set up to invest in corporations, not LLCs. They’d rather deal with the familiar structure of a C-corp, where they can easily grab equity and understand their rights as shareholders. 

Here’s a real story we heard on our podcast: A tech startup in Silicon Valley had a killer app idea, tons of buzz, and an LLC structure. But when it came time to score funding, VC firms passed them by because they wanted the simplicity of a corporation. The startup had to rush to reorganize as a C-corp, losing valuable time — and yeah, a lot of cash — along the way.

The takeaway from this story? Well, investors like things simple, and LLCs don’t always fit that bill.

3. Complexity in Multi-State Operations

Thinking about scaling your business across state lines? Well, we hate to break it to you but an LLC can become a bureaucratic nightmare if you operate in multiple states.

Every state has its own set of rules, fees, and regulations when it comes to LLCs. What works in one state might not work in another. And if you’re operating in more than one state, congratulations — you have to deal with all of those different laws and file as a “foreign LLC” everywhere you go. 

Now, filing as a foreign LLC might sound like a straightforward process, but it can actually result in mountains of paperwork, high compliance costs, and legal fees. 

These are the expenses that can quickly eat into your expansion budget. Apart from that, you’ll be dealing with things like registering in each state, paying extra state-specific taxes, and keeping up with the annual reporting requirements for each jurisdiction. 

And trust us, that can snowball into a time-consuming, wallet-draining process if you’re not prepared. 

Talk to our formation experts if you want to go all granular on foreign LLC. They’ll give you a clear cut picture of both opportunities and challenges.

4. Administrative Costs — Not as “Simple” as Promised

Many people choose LLCs because they seem simpler to manage. But simplicity is in the eye of the beholder. Sure, LLCs don’t need annual meetings, but you’ve still got legal fees and compliance checkboxes, that sneak up on you, faster than you’d think. And miss a tax filing deadline? Well, that’s when the penalty fairy pays you a visit.

Take this story from one of our LLC experts during a 1:1 consultation: A software development company formed an LLC in a state with low initial filing fees. Seemed like a great deal, right? But by year two, the founders were hit with the reality check — the combined costs of annual filings, legal fees, and state taxes were much higher than expected. They later regretted not comparing these ongoing costs to what they’d face with a corporation.

Don’t make that same mistake. If you’re unsure, reach out to our experts. Ask them anything — whether it’s a noob question, unclear, or something you think sounds silly. They’ll be more than happy to walk you through it all!

5. Limited Life Span

Here’s a trivia not everyone knows: in many states, an LLC dissolves automatically if one of its members dies or withdraws from the company unless provisions are made beforehand. Unlike corporations, which have perpetual existence, the future of your LLC may be shaky if you don’t plan for this. 

Imagine your startup hitting its stride, only to face legal chaos because one partner decides to bail. Not exactly what you had in mind for your business’s legacy, isn’t it?

6. Growth? There’s a Catch…

In the early days of your startup, forming an LLC feels like the right fit— minimal paperwork, fewer formalities, and all the flexibility you could want. But as your business grows and you add more employees, investors, and cash flow, that very flexibility can start to feel limiting. 

Managing an LLC with multiple members becomes cumbersome, especially when investors want more control and prefer the clarity of shares offered by corporations. 

Additionally, the tax structure that once felt beneficial — pass-through taxation — begins to sting when you’re paying steep self-employment taxes on all your profits. 

Simply put, what worked for your startup in the early stages might not be suitable as you scale. An LLC can feel like a pair of pants you’ve outgrown — functional, but not comfortable. If you’re seeing signs that your LLC is holding you back, it might be time to consider a corporate structure that’s designed for long-term growth and stability. An LLC might not cut it.

Real Examples of LLCs Gone Wrong

Let’s take a deeper dive into the failures of some startups that initially operated as LLCs. Here’s where the well-intended path of forming an LLC led to business structure regrets.

1. Beepi: Too Big, Too Fast

Beepi’s rise looked like something out of a startup fairy tale. Founded in 2013, Beepi was a peer-to-peer platform for buying and selling used cars. At first, it was a hit. They raised $60 million in their Series B funding round and were on track to become a giant in the used-car market. But here’s where it all went wrong — and where their choice of an LLC structure didn’t do them any favors.

Beepi had a scalability problem. They quickly expanded without considering the financial implications. 

At its peak, they were burning through $7 million per month on lavish executive salaries and operational costs.  Talk about lighting money on fire!

An LLC can sometimes offer flexibility in management, but when a business scales too fast — like Beepi did — there’s less formal governance in place to prevent reckless spending. LLCs don’t always have the same stringent oversight requirements that corporations do, which can lead to financial mismanagement if not carefully monitored. 

Without sufficient checks and balances in place, Beepi’s operating costs exploded, and they failed to secure enough capital to stay afloat. In 2017, Beepi closed its doors and sold off its remaining assets to Fair.com​.

The Lesson? An LLC might seem appealing in the beginning, but it can lack the formal structure needed to curb bad financial habits as your business grows.

2. Yik Yak: The Rise and Fall of Campus Fame

Yik Yak’s story is a little different but equally illustrative of how the wrong business structure can spell disaster. Yik Yak, founded in 2013, was an anonymous social media platform aimed at college students. It was a hit — until it wasn’t. The app grew quickly, attracting millions of users and a valuation of $400 million at its peak​.

But Yik Yak was plagued by issues from within its structure. Being an LLC allowed the company to focus on fast expansion, but the platform became synonymous with cyberbullying and inappropriate content. As universities across the country banned the app, user numbers dwindled. In 2017, Yik Yak shut down​.

The lack of formal structure in their LLC made it difficult to manage these challenges. Without stricter oversight, the team couldn’t pivot quickly enough to handle the growing problem of content moderation. Investors were also hesitant to pour more money into a company that seemed incapable of addressing its internal problems.

LLCs can allow rapid growth, but they don’t provide the same formal structure or accountability that corporations often have, which can be critical when managing crises like public backlash or regulatory issues.

Alternative Business Structures — Is an LLC Really the Best Choice?

Before you race to file your LLC paperwork, it’s worth considering some alternatives that might fit your startup better. Not all business structures come with the same drawbacks. Here’s a quick overview:

C-Corporation: Ideal for startups seeking investment, scalability, and a clear structure. But beware of double taxation.

S-Corporation: Offers pass-through taxation like an LLC, but without the hefty self-employment taxes. There are more rules to follow, though.

Sole Proprietorship: Simple, easy, and perfect for solopreneurs. But there’s absolutely no liability protection. If something goes wrong, your personal assets — your home, your savings — could be on the line.

Learn more: What Type of Business Entity Should You Form?

Choose the Right Business Structure With doola

Picking your business structure isn’t just some quick “check-the-box” task. It’s one of the most critical decisions you’ll make for your startup, and it can shape everything from how you’re taxed to how you’re perceived by investors. Getting it wrong can cost you, both in terms of money and sleepless nights. 

But you don’t have to figure this out on your own.

When you need a helping hand to find the right business structure for your startup, doola’s got you covered. We’ve helped entrepreneurs from over 175 countries build their dream businesses in the U.S., and we’re ready to do the same for you.

Here’s what we can do to support you:

Registered Agent Services: We’ll handle your compliance needs, from receiving legal documents to keeping you on track with deadlines. This way, you can focus on growing your business without getting bogged down by the legal stuff.

Business Formation: Ready to form your LLC? Or maybe you’re considering a corporation? Either way, we make it easy. We handle all the paperwork and help you set up a business bank account, so you’re ready to hit the ground running.

Bookkeeping and Tax Services: Finances can be overwhelming, but we take the stress out of bookkeeping and taxes. We’ll help you stay compliant, so you can focus on what you do best.

Transparent Pricing: No hidden fees — just straightforward, affordable pricing that lets you plan your budget with confidence.

Proven Track Record: We’ve earned a solid reputation for reliability and quality. Our clients trust us to help them reach their business goals, and we’d love to help you too.

And remember, the decisions you make today are the building blocks of your future success.  So, don’t rush it. Take your time, weigh your options, and when you’re ready to take the leap, doola’s right here to help you make it happen — no regrets, just growth.

Ready to take that next step? Book a free consultation with us today