Some families choose to form a family limited liability company (LLC), which is more about protecting family assets than making money. But you might wonder if a family LLC can do business and what else it might be good for.
This guide explains the uses and value of a family LLC and how you can start your own.
What Is an LLC?
An LLC is a popular business structure for small businesses that offer personal liability protection so that your assets are not at risk if your business is sued or cannot pay its debts.
In addition, an LLC is a “pass-through entity” in taxes, meaning that the LLC itself is not taxed. Instead, income passes through the company to the LLC owners or members, who report it on their tax returns.
LLCs also offer flexibility in management, as there are few requirements regarding organizational structure.
These features apply when the LLC is set up to hold family assets.
With a family LLC, the LLC owners, or members, are the family members, and profits are allocated as they wish.
A personal residence cannot be an asset of a family LLC. But family members can put a wide variety of personal assets, such as investment accounts, rental properties, valuables, jewelry, or even a business, into the family LLC as capital contributions.
Then, if an LLC member has a personal financial obligation to a creditor or is sued, the assets, since the LLC now owns them, are protected from being seized to fulfill those personal obligations.
In most cases, parents form the family LLC and act as managing members. Children and other family members are LLC members but are restricted from withdrawing or transferring their financial interests.
When assets are placed in an LLC, a market value is assigned to those assets. However, members often choose to give LLC assets a discounted value of maybe 60 percent of the market rate. This reduced value lowers estate and gift tax obligations.
A family LLC also allows you to control distributions to members before and after the death of the managing members. How and when distributions are made is usually specified in the operating agreement.
The Operating Agreement
An operating agreement is not legally required in many states, but it’s crucial for a family LLC. It will specify the following:
- Percentage of each member’s interests in the LLC
- Profits and loss allocations
- Each member’s rights and responsibilities
- Management structure and roles of members
- Voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
A family LLC operating agreement also needs to detail the restrictions on non-managing members and how and when profit distributions will be made.
Be sure to hire an attorney to assist you with the formation of your family LLC and drafting the operating agreement.
Can a Family LLC Make Money?
Family LLCs mostly make money from returns on assets but are rarely used for business, which involves very different operations and management. Therefore, it’s best to avoid combining the two approaches.
How to Form a Family LLC
Forming a family LLC is quite similar to forming a profit-minded LLC.
1. Select a Name for Your Family LLC
You’ll need to choose a name for your family LLC and make sure it’s available. Then, you can check your state’s website, usually the Secretary of State’s, to see if anyone else is using your chosen name.
2. Select a Registered Agent
Most states require that you appoint a registered agent for your LLC. A registered agent is a person or company authorized to accept official correspondence for your business, such as legal, tax, or financial documents. A registered agent ensures your business stays in compliance with state laws.
In most states, a member of the LLC can be the registered agent, or you can choose an individual that meets your state requirements. Generally, the requirements are that the registered agent:
- Be 18 years or older
- Have a physical address in the state
- Be available during regular business hours
- Be registered to operate in the state, if it’s a business
Some states have more specific requirements, so check the rules in your state.
Many business owners hire a registered agent service to ensure all essential documents are received and addressed promptly. A registered agent service also offers convenience.
If you choose to be your registered agent, you’ll have to be available at your registered agent’s address during regular business hours.
3. File Necessary Documents with Your State
In most states, the document you need to file to make your LLC official is the articles of organization. In some states, it’s called a certificate of organization or a certificate of formation.
Generally, you can file the document online, usually on the Secretary of State’s website. The document requires your business name, address, registered agent information, and sometimes member or manager information.
Filing fees vary by state and range from $40 to $500. Depending on the state, your LLC should be approved within a few weeks of filing.
4. Draft an Operating Agreement
Again, you’ll want to have an attorney help with your family LLC operating agreement, which needs precise language about ownership, member rights, distribution, and plans for the family estate.
5. Obtain an Employer Identification Number (EIN)
Since your LLC will have multiple members, you must get an EIN for tax reporting purposes. Obtaining an EIN simply requires applying on the IRS website.
The IRS rules for obtaining an EIN are as follows:
All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. This individual or entity, which the IRS will call the ‘responsible party,’ controls, manages, or directs the applicant entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.
6. Transfer Assets to the Family LLC
To transfer assets into the LLC, do the following:
- Put cash contributions into an account under the name of the family LLC
- Transfer brokerage accounts to the family LLC’s name
- Transfer any titled assets, such as vehicles or property, into the name of the family LLC
- Record transactions of personal items of value being transferred to the family LLC
You’ll need to assign market values to these assets. Your attorney should assist with this process as well.
7. Annual reports
Most states require an annual or biennial report to verify your LLC is still active. These can generally be filed online. A small fee usually applies and varies by state.
Family LLCs can help to protect your assets and plan your estate. It must be stressed that having an attorney’s help with the entire process of setting up your family LLC is crucial. It will ensure that everything is done correctly and that your assets and heirs are protected.