How to Form a Family LLC 

9 steps to form a family limited liability company

Follow these nine steps to form your family LLC:

1. Choose your members. The owners of an LLC are referred to as “members.” Each member has ownership interests in the LLC. Members of an LLC can share management duties, elect one member to manage the company, or choose a nonmember manager to handle the LLC’s daily operations. 
2. Select a business name. You and your family will need to come up with a name for your business in order to register your LLC with the state. Your LLC name should be distinctive and comply with government naming guidelines.
3. Choose a registered agent. A family LLC needs to have a registered agent to receive legal documents on behalf of the business. 
4. File your articles of organization. The articles of organization (also known as a certificate of organization or certificate of formation) are a document that you file with your state to establish your LLC as a legal entity. 
5. Draft an operating agreement. An operating agreement is a document that outlines how your business will be managed and the responsibilities of the members. While you can kick things off with an LLC operating agreement template to speed up the drafting process, it’s wise to bring in an attorney if your setup involves complex ownership, profit-sharing, or succession plans. 
6. Get an employee identification number (EIN). The IRS requires multimember LLCs to have an EIN. You can apply for one free of charge on the IRS website or use an online EIN service.  
7. Open a business bank account. A business bank account can help your family LLC preserve its legal entity status by maintaining a clear separation between business and personal finances.  
8. Obtain necessary licenses and permits. You may need to get federal, state, and local business licenses and permits in order to operate your family LLC. 
9. Maintain your family LLC. You will need to ensure that your business remains compliant with applicable annual reporting, licensing, and permit requirements. 

What is a family LLC? 

As the name implies, a family LLC is an LLC that is formed by members of a family. A family LLC typically maintains (and may be required by the state to have) an operating agreement that explains how the LLC will be managed and the roles of each member.

An operating agreement can serve to protect a family LLC’s status as a legal entity, clarify specific business arrangements, and establish control over how the business operates, as state default rules may govern LLCs that don’t have a written operating agreement in place.

An LLC is a popular choice for business owners who want to take advantage of the personal liability protection and tax benefits the structure offers. Families often form a family LLC for both business and estate planning purposes.

For instance, the IRS allows family LLCs to use valuation discounting as an estate and gift tax planning technique. That means that an older generation in a family LLC can apply valuation discounts when transferring assets to the next generation. Valuation discounts can reduce the value of the property and decrease estate, gift, and generation-skipping transfer taxes.

Keep in mind that it is essential to avoid comingling personal and business finances. If you utilize valuation discounts, you may be subject to increased scrutiny by the IRS to ensure they are structured properly. It’s important to get help from a professional when deciding how to use your family LLC for estate planning purposes.

Why would a family incorporate or form an LLC? 

There are several reasons why a family might incorporate, and the type of business structure they choose depends on their goals.

For instance, some families choose to establish a corporation to make it easier to get financing from venture capitalists or set up an employee stock option plan. 

Many families choose to form a family LLC for the following reasons:

• To help protect assets from creditors
• As an estate planning tool
• For tax benefits and ownership flexibility
• To give family members control over business decisions 

For example, a family farm operation may choose to form a family LLC to separate family land interests from the farm’s business liabilities and to help ensure a smooth transfer of land ownership. 

The type of family incorporation or business entity that is best for you depends on your unique circumstances, but you might consider forming a family LLC first and converting to a corporation as your business evolves. 

Benefits of creating a family LLC

The benefits of forming a family LLC can include the following:

• Wealth centralization. Members of a family LLC can pool their resources and manage investments as a family. The operating agreement can restrict members from transferring their ownership interests to anyone outside the family to ensure the family business—and wealth—stays in the family.
• Asset protection. A family LLC can help protect members’ personal assets from creditors.  
• Tax options. By default, a multimember LLC is taxed as a partnership, which means that the LLC itself isn’t responsible for paying taxes on its income; rather, the profits and losses “pass through” to the members of the LLC. Members are required to report their share of the profits and losses on their personal income taxes. A family LLC also has the option to elect to be taxed as a corporation. 
• Estate planning tool. A family LLC can help facilitate a smooth succession of wealth. Families with significant assets often use a family LLC to minimize estate taxes when transferring assets to future generations. 
• Family control over business decisions. A family LLC can encourage family collaboration regarding business decisions. An LLC can provide each member of the family with ownership rights, giving them control over business decisions. 

Comparing family entities 

Here are some of the main differences among family LLCs, trusts, and family limited partnerships (LPs). 

Family LLC vs. trust

A trust is a popular estate planning tool for individuals who want a way to transfer their assets to beneficiaries and avoid probate. The person who sets up the trust (the grantor or settlor) can transfer property into the trust, which is managed by a third party (the trustee). The trustee holds the legal title to the property until they administer the assets to the beneficiaries.

While both trusts and family LLCs can be used as estate planning tools, there are a few important differences between the two. A trust is a legal arrangement for transferring assets to beneficiaries that is often used to avoid probate and protect the family’s privacy, while a family LLC is a business structure that can play a role in estate planning in addition to being used to manage business operations and limit liability. 

Family LLC vs. family limited partnership

A family LP consists of general and limited partners. The general partners (often the older family members) manage the business and its assets and the limited partners (typically the younger family members) share in the business’ financial gains. Family LPs are often used to preserve business assets and pass the business on to the younger generation. 

The main difference between a family LLC and a family LP is that a family LP’s liability protection only covers limited partners, while a family LLC provides liability protection for all of its members. 

When is a family LLC right for you? 

The right type of entity for your family business depends on your unique needs. 

You may want to consider a family LLC if any of the following applies to you:

• You want a structure that provides ownership flexibility and tax advantages.
• You want an entity that enables your family to collectively manage your business.
• You need a business structure that provides liability protection.
• You want a business structure that can be used in estate planning.
• You’re not looking for the enhanced privacy protection a trust can offer. 
• You don’t need general partners to control management of the business, as with a family LP.

If you’re not sure what business structure is best for your family, you can consult with an experienced estate planning attorney or use an online business formation service. 

FAQs

What is the downside of a family LLC?

The main downside of a family LLC is the cost of setup, which can include registration and legal fees. Setting up more complex LLCs can potentially cost several thousand dollars. However, you may be able to save money otherwise spent on attorney fees by using an online LLC formation service like LegalZoom. 

What is the purpose of a family LLC?

Many families form a family LLC to protect their assets, reduce estate taxes, pass ownership interests to heirs, give the family control over business decisions, and take advantage of the tax benefits and ownership flexibility the structure provides. 

Is a family LLC better than a trust?

When it comes to estate planning, a family LLC isn’t necessarily better than a trust, and you can use both tools as part of a comprehensive estate plan. Trusts are often used to avoid probate and provide privacy protection, while a family LLC can be used for families that want to consolidate assets and pass business ownership interests to the next generation. 

What are the tax advantages of a family LLC?

A family LLC has options when it comes to taxes. By default, a family LLC is treated as a pass-through entity for tax purposes, but it may elect to be taxed as a corporation. In addition, a family LLC can be used to minimize estate taxes. 

What is the difference between a family LLC and a regular LLC?

The main difference between a family LLC and a regular LLC is that regular LLCs are typically used for general business purposes, while a family LLC can also be used as an estate planning tool.