Family business ownership is an integral part of American history and commerce. In fact, about 90% of American businesses are family-owned. Business and families have varied purposes, so it should come as no surprise that certain business entities offer greater protection to family-owned enterprises. Of course, there are pros and cons to any of those entity types, including family limited liability companies.
The Family Limited Liability Company
You may have heard of family limited liability companies (FLLC) and their first cousin, the family limited liability partnership (FLLP). The structure is essentially the same:
The FLLC or FLLP is established, usually by senior members of the family, then funded. Children or other beneficiaries receive limited interests in the FLLC/FLLP. However, in an FLLP, there is at least one general partner who absorbs the majority of the risk. Limited partners enjoy more protection as they do not control the company or even have little or nothing to do with its day-to-day operations. An FLLC, however, provides protection to all partners or members.
Pros to Forming a Family Limited Liability Company
Forming an FLLC provides the following benefits to the owners, partners, and members.:
- Easier transfer of family business to the next generation.
- An FLLC is a pass-through entity for income tax purposes. The FLLC income passes to partners, who report the income tax and pay any tax that is owed. Minimizes federal gift and estate taxes:
- The business value of the FLLC members’ interest is lowered due to lack of participation in management.
- Distribution of the business interests freezes their value and removes appreciation from the owner’s future estate.
- Owners retain control over assets. Owners / senior managers may use annual gift tax exclusion to avoid paying gift tax when transferring business interests to limited partners.
Cons to Using a Family Limited Liability Company
Of course, there are some disadvantages to using an FLLC:
- The FLLC must meet IRS requirements or risk being considered something other than an FLLP or FLLC. There may be tax consequences if the FLLC seems to have been formed only to avoid paying taxes.
- Owners must be careful to put only business assets into their FLLC. Don’t commingle business and personal assets.
- Limited partners (typically the children of the owners) may be exposed to future capital gains liability.
- The general partners or managers of an FLP are vulnerable to some risk.
- An FLLP or FLLC is probably not the best way to transfer assets to minors. Consult with an attorney if any of the limited partners will be minors.
Is a Family Limited Liability Company Right for You?
Learn more by scheduling an appointment today. The attorneys at Virtus Law have the experience to analyze your current business structure and advise you on any necessary changes. Contact us by calling 612.888.1000 or by emailing us at email@example.com.