Families with significant assets or a family-owned business often choose to start a family LLC. Doing so can help protect those assets from creditors, enable the smooth transition of wealth from one generation to another, and aid in estate planning. However, a family LLC is subject to the same regulations as a regular LLC, so understanding how they work is essential to decide if forming one is the right choice for you.
Forming a family LLC is not inherently a difficult task, but it requires thought and careful planning, and you’ll want to avoid taking shortcuts. When creating a family LLC, working with an experienced financial advisor is often helpful.
What Is a Family LLC?
A family LLC is a closed corporation formed and operated by two or more family members to manage financial and legal responsibilities of it's members. While non-family members may be a part of the LLC, the family members should own the majority of the business. A key component of what makes family LLCs valuable to it's members is the operating agreement. An operating agreement is made at inception that defines the ownership rights and other decision-making regulations per legal requirements and the desires of members. Operating agreements can reduce stress or conflict in decision-making down the road, giving all members a shared process by which things happen.
Regulations that govern the formation of a family LLC can also vary significantly from state to state, so the LLC's location is also a major factor. These regulations can present certain challenges to a family LLC, but there are still many benefits to be gained as well.
Benefits of Forming a Family LLC
Consider the family LLC as you would a regular business. But what separates a family LLC from a regular LLC are some of the unique benefits. A primary family LLC benefit is strategic tax minimization — federal gift and real estate taxes may be minimized, and distributed business interests are not subject to appreciation. However, it should be noted that a family LLC must also meet IRS requirements, and it is not a corporation that can be formed simply to avoid paying taxes.
One of the main benefits that would encourage the development of a family LLC is increased liability protection when the main assets of a family are part of the business. Additionally, the development of a family LLC includes a formalized process to avoid family disputes, critical to make sure business disputes don't become familial disputes.
A Wealth Management firm experienced in family LLCs can also be of great value, ensuring that the processes and guidelines of forming the LLC are properly adhered to. This will certainly help to avoid the simple and complex precedural things that can lead to an audit.
Best Practices for Starting a Family LLC
Tap someone knowlegeable. You can create many types of family LLCs, depending on your needs and intentions. Whether you are forming an LLC to invest your assets or to manage them and keep them protected, specific guidelines must be followed when starting your family LLC. As mentioned above, working with a financial advisor can also be incredibly beneficial when planning to start or maintain your family LLC. Consider this guide on how to find a financial advisor that works for you.
Dot the i's and cross the t's. Once you’ve decided to start a family LLC, the first step is filing your paperwork. This can be tedious, as many forms, licenses, and permits must be obtained and vary by state. You’ll need to file them all to ensure that your LLC complies. You won’t be able to operate the family LLC legally otherwise. Additionally, attempting to use your LLC without complying can result in penalties and fines, and possible criminal charges.blog blog
Clarity is key. You’ll also need to spend some time drafting your operating agreement and making sure everyone who is part of the family LLC understands their rights and purposes as a member of the corporation. The details of your operating agreement will depend on the purpose of the LLC itself and must include a clear description of who has what rights when making decisions that affect the corporation.
Teamwork. As mentioned above, it is also likely that you will employ non-family members as part of your LLC. It is essential that non-family members are treated the same as family members. This will help keep all workers motivated and assure them that their contributions to the company are valued and appreciated.
However, it is still possible that some employees just won’t work out favorably. Even certain family members might be damaging in their role. To that end, drafting contracts for each employee — both family and non-family — can greatly aid in ensuring you have a viable exit strategy for employees should the need arise.
Clear Boundaries. Finally, it is important to remember that keeping your personal life separate from your business life is essential to the success of a family LLC. Members of the family LLC should consider keeping their personal finances and accounts separate from business accounts. Likewise, try not to let business decisions and discussions intrude too much upon your personal life, as this can make the running of the family LLC seem overwhelming.
Is a Family LLC Right For You? How to Get Started
To learn more about forming a family LLC and what is required, consider talking with an experienced financial advisor. Before choosing an advisor, you should interview several candidates. This will help you find one that best aligns with your financial goals.
Plancorp specializes in wealth and asset management. We are evidence-based investors and focus on making sure our clients' investments support their life goals as one piece of their overall financial plan. Other services include estate planning, tax strategies, philanthropic guidance, insurance, and equity compensation. Contact Plancorp today to get started.