Family LLC

If you’re looking to start a family business, you’ll be making some key decisions including what legal entity to use. Some of the legal entities you might have to consider include simple partnerships, family LLC, or corporations. Setting up a partnership affords your business more flexibility, while a corporation ensures your personal assets are protected. However, opting for an LLC might be your best bet if you want the best of both worlds.

Family LLCs follow the same rules and regulations as non-family LLCs. This guide will help you understand what starting a family LLC entails and provide you with all the information you need to make an informed decision. 

What is a family LLC? 

A family limited liability company (LLC) is an LLC formed by family members to operate a business. In most cases, members of a family LLC are related by blood, marriage, or adoption. The family LLC is a way to secure the family business against claims by creditors, assist in estate planning, and divide wealth across generations.

One member of the family often serves as the managing member, and, as with normal LLCs, an operating agreement is often put in place. (For more information please see our operating agreement definition page.) The family LLC operating agreement is essential as it restricts and dictates: 

• Ownership rights
• Transfer of assets 
• Functional decision-making 
• Day-to-day operation and activities.

What can a family LLC be used for?

As stated above, a family LLC can be used for protecting assets and estate planning. 

Protection of Assets

A family LLC can help protect your personal assets from creditors’ claims. Since a family LLC is a separate legal entity from its members, creditors can only go after the company’s assets. So, unless the members have personally guaranteed debts, their personal assets, such as bank accounts and homes, are protected.

Estate Planning 

Setting up a family LLC can also play a key role in estate planning. Families with substantial assets can minimize estate tax through significant valuation discounts the IRS affords family LLC assets. This allows you to transfer your assets to younger generations before reaching the estate tax threshold. Asides from the estate tax, you can also avoid paying gift tax as long as you’re giving within the gift tax exclusion limit.

As of 2023, the IRS estate tax threshold and annual gift exclusion limit are $12.92 million and $17,000, respectively.

Family Limited Partnership vs. LLC 

Like a family LLC, a family limited partnership (FLP) is another way family members can manage the ownership of a business. However, unlike a family LLC, the ownership of FLP is split into two categories — general and limited partners. In most cases, the general partners handle decision-making in terms of management and investment, while limited partners benefit financially from the business. See family limited partnership (FLP) definition.

FLP also makes it easy for older generations to keep business assets within the family as they hand over management to their heirs. FLP can also be an effective tool for estate planning. However, unlike family LLCs, protection from liability is only extended to limited partners.

Family LLC Benefits

A family LLC can be advantageous in a few ways. Here are some of the benefits of starting a family LLC:

• It can offer protection of personal assets from creditors more than partnerships. 

• It facilitates the seamless transfer of company assets to business heirs. 

• It can help conserve generational wealth by preventing the transfer of assets to nonmembers of the family. 

• Family members can enjoy lower gift and estate tax rates when passing assets to their heirs. 

Downsides to a Family LLC 

A family LLC also has its limitations. Hence, having a good understanding of said limitations can help you decide if a family LLC is right for you. Here are some downsides to a family LLC: 

• They entertain more attention from the IRS. The IRS scrutinizes and audits them to ensure the LLC isn’t solely created to evade taxes. 

• Due to the lack of uniformity in state tax laws, you might incur more administrative costs reviewing state laws. 

• You may need to rely on the IRS to intervene on specific issues. For example, the IRS has yet to clarify the application of the cash method of accounting and passive loss rule to LLCs.

• An LLC with restrictions on transferability of interest may find it challenging to obtain new equity.

Starting a Family LLC 

If you’re all set on a family LLC after weighing your options, what’s next is how to start a family LLC. Below are some steps to follow to ensure a seamless process: 

• Create a name for your LLC that follows your state’s rules and regulations. 

• Appoint or hire a registered agent to receive the service of process and other important legal documents. 

• File Articles of Organization, also known as Certificate of Organization in some states, with your state and pay the filing fee. (Check out the Articles of Organization definition)

• Put an operating agreement in place to dictate how the business will operate.

• Get an employer identification number (EIN) from the IRS.

• Follow all federal and state rules for the starting and running of LLCs, including obtaining any required licenses and permits. 

We can help!

Now you understand the nitty-gritty of how a family LLC works. However, you may be new to the business scene and don’t know how to go about it. We can help; our company has LLC formation services and many services to help you get started today for $0. We’ll do the heavy lifting and provide you with all the support you need to have the best of beginnings.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.