A family limited liability company (LLC) is formed by family members to conduct business in states that allow LLCs. Members must be related by blood or marriage. The family LLC is a popular way to protect the assets of a family business against claims by creditors, divide income among generations, and assist in estate planning. It is a type of closed corporation.

Family LLC Formation

A family LLC is formed by one family member who serves as the managing member. The family LLC's operating agreement defines and restricts rights related to ownership, functional decision making, and transfer of assets. A family LLC can be formed for legal business purposes, such as real estate or brokerage account management. However, a family LLC cannot be used to manage a personal residence.

An LLC is a legal entity that enjoys the limited liability of a corporation and the operational and managerial flexibility of a partnership.

Family LLC Cost

A family LLC is typically costly to form and maintain and requires legal counsel who has experience with setting up family businesses. Of course, while not necessary, it's always a plus if the attorney is also familiar with the type of business the family owns.

Legal fees may range from $3,000 to over $10,000, depending on complexity. Other expenses a family LLC can expect to incur, include the costs surrounding annual meetings and fees associated with preparing and filing tax returns, which must be done on a quarterly basis.

Asset Protection

As noted above, a family LLC is a useful tool to shield family assets from creditors' claims. Each member's financial contribution limits his or her debt liability for the LLC. Members may be prohibited by the operating agreement from withdrawing and then reacquiring their interests in the company that can be later claimed by creditors.

Other restrictions, such as an absence of certain members' rights to vote or oust the management, limit the ability of creditors to interfere with LLC operations and seize the LLC's assets.

Estate Planning

In addition to its use for business purposes, a family LLC is widely used in estate planning. A family LLC can help you control and protect assets during your lifetime, keep assets in the family, and reduce taxes owed by you or family members during your lifetime or after your death.

The Bottom Line

Whether to protect a family business from creditors or outside claims, or for estate planning purposes, it may be wise to look into forming a family LLC. All family LLCs require the legal expertise of an attorney who is familiar with setting up family businesses. Family LLCs should also be set up in a state that has protective LLC laws.