A family limited liability company (LLC) is formed by family members to conduct business in states that permit LLCs. Members must be related by blood, adoption, or marriage. A family Family Limited Liability Company LLC is a popular way to protect a family business’s assets from creditor claims, divide income among generations, and aid in estate planning. It is a type of closed corporation.
Family LLC Formation
After you’ve considered your options and determined that a family Limited Liability Company LLC is the best fit for your business, you’ll need to form it. To create a Family Limited Liability Company LLC, follow the steps below to create an LLC and include the family members who will be involved in the business. Check your state’s local regulations, as each state has its own statutes governing LLCs.
The following are the general steps to forming an LLC:
- Choose a name for your LLC that is legal in your state.
- File Articles of Organization with your state and pay the filing fee. Some states refer to this document as a “Certification of Formation” or “Certificate of Organization.”
- Articles of Organization filing fees are typically no more than $100, but fees vary by state.
- Determine who will accept service of legal documents as a registered agent.
- Determine whether the LLC will be managed directly by its members or by a third party.
- Develop an Operating Agreement that outlines how the LLC will be run and managed. While not all states require operating agreements for LLCs, you should draught one. The operating agreement for a family LLC should list your family members and prohibit transfers of membership interest to non-relatives. This ensures that the family LLC stays in the family’s hands.
- Comply with all state and federal laws and regulations that apply to LLCs. This includes obtaining an IRS employer identification number (EIN), obtaining necessary business licenses, paying annual state taxes, and filing regular state reports. Fees for filing the required annual or biennial report can vary greatly depending on where you live. Annual taxes for LLCs vary significantly by state, so check your local statutes.
After forming a Family Limited Liability Company LLC, you can transfer your business assets, such as real estate, bank accounts, and valuable personal property, to it. Be aware that the terms of any loans or leases may require you to obtain the lender’s or landlord’s permission before successfully assigning the loan or lease to the LLC.
You have worked extremely hard to build a successful family business. When deciding on a legal entity, make sure to consider your company’s needs as well as its future plans. Consider forming a Family Limited Liability Company LLC if you want to protect your assets, maintain flexibility, and benefit from estate and gift tax savings.
Family LLC Cost
A family Limited Liability Company LLC is typically expensive to form and maintain, and it necessarily requires the services of a legal counsel with experience in establishing family businesses. Of course, while it is not required, it is always a plus if the attorney is also familiar with the type of business owned by the family.
Legal fees can range from $3,000 to more than $10,000, depending on the complexity of the case. Other expenses that a family Limited Liability Company LLC can expect to incur include the costs of annual meetings and the fees associated with preparing and filing tax returns on a quarterly basis.
Advantages of a Family Limited Partnership
The formation of a FLLC provides the following advantages to the owners, partners, and members:
- Easier transfer of family business to the next generation.
- For income tax purposes, a FLLC is a pass-through entity. The FLLC income is passed on to the partners, who must report the income and pay any taxes owed. Federal gift and estate taxes are reduced.
- The lack of participation in management reduces the business value of FLLC members’ interests.
- The distribution of the business interests freezes their value and removes any future appreciation from the owner’s estate.
- The assets are still under the control of the owners. When transferring business interests to limited partners, owners and senior managers can use the annual gift tax exclusion to avoid paying gift tax.
Disadvantages of a Family Limited Partnership
- The FLLC must comply with IRS regulations or risk being classified as something other than a FLLP or FLLC. If the FLLC appears to have been formed solely to avoid paying taxes, there may be tax consequences.
- Owners must exercise caution in putting only business assets into their FLLC. Do not mix your business and personal assets.
- Limited partners (typically the owners’ children) may be liable for future capital gains.
- An FLP’s general partners or managers are exposed to some risk.
- An FLLP or FLLC is probably not the best way to transfer assets to minors. Consult an attorney if any of the limited partners will be minors.