Are there any circumstances under which an LLC is not an appropriate form to use?

There are some circumstances where an LLC may not be the best choice:

1. You intend to involve outside investors in the company. Some types of investors will not or cannot invest in an entity structured as an LLC because of the potential negative tax implications of investing. Some investors may insist on the familiarity and certainty of the management and governance structure of a corporation.
2. You intend to grant equity to employees. While this is possible to do with an LLC, granting interests in the LLC to employees has a number of tax consequences to the employee; for example, by receiving an interest in the LLC, the employee’s status for tax purposes converts to that of a member in the LLC, which can have adverse tax effects for that individual (such as imposing self-employment taxes, creating additional tax filing requirements, and making the individual ineligible for certain types of employee benefits). Additionally, you will need to file a Schedule K-1 for every individual who has an interest in the company—which creates administrative hassles.