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Family LLC (What It Is And How It Works: All You Need To Know)

What is a Family LLC?

What are the benefits of forming a family LLC company?

How does it work?

Keep reading as we have gathered exactly the information that you need!

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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.

Formation Costs

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 

LLC Managers

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?

Asset Protection

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

  • A family LLC is generally formed among family members to operate a business (there must be a business purpose for it)
  • Fundamentally, a “family” LLC is a “regular” LLC or limited liability company (the Secretary of State or state agencies allow for the formation of LLCs by its members)
  • In the case of a family business operated as an LLC, the members of the LLC are all related family members such as parents, grandparents, children, grandchildren, or other
  • There are many reasons why a family may want to form an LLC such as: Family LLC for estate planning or Family LLC real estate 
Articles of organization 
Capital interest 
Charging order 
Commercial real estate 
Estate planning 
Estate taxes 
Family limited partnership 
Family trust 
Gift taxes 
Holding company 
Irrevocable trust
Limited liability partnership 
Operating agreement template 
Power of attorney 
Roth IRA
Trust company 
Validation discount
Author
Anonymous LLC
C corporation
Double taxation 
General partner
Limited partner 
LLC member
LLC vs INC
LLC vs LLP
Multi member LLC
Operating agreement
Pass-through entity
Personal asset protection 
Restrictive covenants
S Corp vs LLC
S corporation 
Series LLC
Single member LLC
Tax strategies
Author

Editorial Staff
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I'm passionate about law, business, marketing and technology. On this blog, I share my experiences, provide you with golden nuggets of information about business, law, marketing and technology. Enjoy!

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