What is a Family LLC?
What are the benefits of forming a family LLC company?
How does it work?
In this article, we will break down the notion of Family LLC so you know all there is to know about it!
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What Is A Family LLC
A “family LLC” or “Family Limited Liability Company” is essentially a limited liability company formed by family members in jurisdictions where LLC companies can be formed.
An “LLC” or “limited liability company” is a type of company that provides its owners with limited liability protection and allows them to pass-through business income on the member’s personal income taxes.
You can consider an LLC to be like a hybrid of a corporation and a partnership.
In Family LLCs, the owners (or members) are related by blood, marriage, or adoption (family members).
A family LLC can be formed to operate a business, manage investments, or pursue a commercial activity, such as:
- Real estate investments
- Rental properties
- Brokerage companies
Family members are not permitted to set up an LLC for the family to own and manage personal assets.
The main difference between a “family” LLC and a “standard” LLC is that the family LLC is owned and operated by members of a family.
Formation of A Family LLC
Let’s look at a few aspects in relation to the formation of an LLC family.
There are some costs associated with forming an LLC to operate a family business or enterprise.
Typically, the formation costs may include:
- State filing fees
- Lawyer fees (if a lawyer is hired to handle the formation procedure) or service provider fees (companies specialized in providing legal entity formation services)
The state filing fees will depend on the fees established by each state.
As it relates to legal fees, a lawyer’s fee may vary depending on the nature of the services rendered and the complexity of the family LLC setups.
Once the LLC is formed, the members will need to be mindful of ongoing maintenance costs such as annual filing fees and tax returns.
Family LLC Operating Agreement
When a “family” LLC is formed, the family LLC operating agreement is an important document outlining the rights and responsibilities of the LLC members, the governance of the LLC, the decision-making process, and so on.
Even though the members of the LLC are related, it’s important that clear and proper rules are established to ensure the smooth operations of the business and prevent internal conflict (which can inevitably result in family conflict as well).
The objective of an operating agreement is to provide LLC members (who happen to be family members as well) with additional protection in the way the LLC is operated and particularly in how the members can transfer their rights and how the ownership of the LLC is managed.
An operating agreement can help achieve a few goals:
- Protect the family assets from creditors and claims
- Protect the family business against a charging order obtained by a creditor
- Ensure that creditors do not interfere in the family business operations
Generally, the LLC is managed by designated managers.
In a family LLC, the managers are typically senior members of the family who make the important decisions for the LLC, such as:
- Purchase decisions
- Selling of assets
- Distribution of funds
It’s common to see parents run the LLC and control its operations for the benefit of the other partners, children, grandchildren, or other members of the family.
Advantages of Family LLCs
What are the benefits of operating a family business under a family LLC structure?
One important advantage or benefit of setting up a family business under an LLC is to protect the family assets from business creditors.
Essentially, a limited liability company shields the family assets from possible claims.
Each member of the LLC will have a financial exposure limited to his or her contribution to the company.
Family LLC Estate Planning
Another reason why families choose to operate an LLC is for estate planning purposes.
A “family LLC” can hold the family assets during the lifetime of the members and provide a legal vehicle to reduce the overall taxes paid.
The same is true upon the passing of a member.
It’s important to consult with a tax expert, accountant, or tax lawyer for specific details but generally speaking, a family company can be useful for estate planning needs.
Business Income Taxation
Many choose LLCs as they offer more flexibility than corporations in how the business income is taxed.
Business owners and families who choose an LLC tend to be attracted to the personal asset protection offered by the LLC legal entity and because LLCs are taxed like partnerships.
An LLC member can report the LLC revenues on his or her personal income tax in the same way as a partnership (something call pass-through taxation).
Each LLC member will report the LLC revenues on his or her personal income in proportion to their interest in the LLC.
Disadvantages of Family Limited Liability Company
Although there are good advantages in setting up an LLC to operate a family business, it’s equally important to consider any possible drawbacks.
Here are some disadvantages that family members looking to partner up in an LLC should consider:
- The IRS audits and scrutinizes family LLCs
- It’s important that the purpose be legitimate and not merely to avoid paying taxes
- Family members should not commingle personal assets with the family business assets
- Limited partners (generally children) should consider future capital gain taxes
- General partners have more liability than limited partners
If you are looking to form an LLC for a family enterprise, you may want to consult with a tax advisor, lawyer, or professional to properly understand the structure and the consequences.
Family Limited Liability Corporation Takeaways
So, what does a Family LLC mean?
Why do people form an LLC for their family?
How do family limited liability companies work?
Let’s look at a summary of our findings.
Family Limited Liability Companies
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