A family limited liability company, or family LLC, is a type of business entity that provides asset protection and tax benefits for its owners. It can also be used to manage and preserve family properties to allow for intergenerational ownership and management.

A family LLC is subject to the same Internal Revenue Service (IRS) rules and regulations as a non-family LLC. Members of a family LLC must be related by blood, adoption, or marriage.

Members of a family LLC commonly own rental properties, brokerage companies, and a family’s other business operations. The LLC can own anything except for a personal residence because this would violate its tax status.

How does a family LLC pay its taxes?

In terms of taxation, a family LLC owner can choose that the LLC be taxed as a pass-through entity, meaning that income passes to the partners who pay any taxes owed, or as a corporation. The business will not be taxed separately if the family LLC elects to be taxed as a pass-through entity. Instead, the business distributes profits to its members, and the members pay personal income taxes on these distributions.

If the family LLC owners choose to be taxed as a corporation, the business entity is subject to corporate income tax on its profits. Any profits distributed to the LLC owners will also be taxed at the individual level, which does result in double taxation. The family LLC may also be subject to state taxes.

How does a family LLC provide asset protection?

An LLC’s operations are restricted to those in its operating agreement. These restrictions also provide protection from creditors. For example, suppose a certain member does not have the right to vote or replace the LLC management. In that case, their creditors cannot interfere with the LLC’s operations or seize its assets.

A family LLC, because it is a separate business entity, shields the personal assets of its members from business creditors. If there are judgments or creditor claims against the business, the creditor cannot go after the member’s personal assets to cover these financial obligations. A family LLC keeps business and personal finances separate.

How does a family LLC help with estate planning?

A family LLC has many estate planning benefits. It can help you control and protect the LLC’s assets, keep them in the family, and reduce taxes owed by family members in the LLC.

A family LLC can be helpful if you have an estate valued higher than the federal estate and gift tax threshold. The IRS allows for significant discounts when valuing assets in a family LLC.

Family LLCs provide flexible ways to manage and distribute assets. Establishing a family LLC can simplify the process of transferring assets between generations without giving up the LLC. By transferring their assets to the LLC, managing partners can reduce their estate value, which can reduce their tax burden.

The non-governing members of a family LLC have a decreased interest in the business, lowering their federal estate and gift taxes.

How do you form a family LLC?

A family LLC is started by one family member who serves as the managing member. Like a non-family LLC, a family LLC has an operating agreement that defines everyone’s roles and restricts rights related to ownership, operational decision-making, and transfer of assets.

The steps to forming a family LLC are similar to the ones needed to form a business LLC. While the steps may vary by state, to form a family LLC, you would:

• Talk with your estate planning attorney to determine whether a family LLC would meet your estate planning needs.
• Discuss the purpose of your family LLC and choose a name that complies with your state’s requirements.
• File a certificate of formation or a certificate of organization with your state and pay the filing fee. These fees vary by state but are typically less than $100.00.
• Enlist the services of a registered agent to accept service of any legal documents for your family LLC.
• Obtain an IRS employer identification number. It is simple to apply for these online, and there is no cost. Doing so protects your social security number.
• Determine who will manage the LLC.
• Prepare your operating agreement. This document details how your family LLC will be operated and the role of each member. While not all states require an LLC operating agreement, preparing one is a good idea. Your operating agreement should list every family member and state that membership interest transfers to non-relatives are prohibited. This will ensure that your family LLC remains family-owned.
• Make sure your LLC complies with all federal and state requirements. You may need business licenses. You may also be required to pay state taxes and file regular reports on your LLC.
• Transfer your business assets to your LLC. Check the terms of any loans and leases before assigning them to the LLC.

Considerations when forming a family LLC

Forming a family LLC and managing its taxes can be complex. Talk to your estate attorney or tax professional to evaluate the benefits and drawbacks of forming a family LLC.

If you are interested in establishing a family LLC as part of your estate plan,  schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.