Some business people and professionals unexpectedly and quickly find themselves caught in a business financial crisis that might cost them their personal assets. For example, a person who cuts lawns and repairs sprinklers incorrectly installs a sprinkler, causing a flood in the basement of a client, or a person who cuts people's hair incorrectly applies a hair dye, causing a burn on the client's skin. Each of these mistakes can lead to a lawsuit being filed by the client.
In such a scenario, if the business owner operates the business in their own name, the client will sue the owner personally and the owner's personal assets, like their car or house, can be taken by a court to pay the client's damages. The best way to protect your personal assets is to keep them separate from business assets by forming a limited liability company (LLC) and operating the business as an LLC.
An LLC can also be used as a vehicle for families to invest and manage investments together. The family LLC can invest in real estate, stocks, bonds, mutual funds, and businesses. While many families who invest together think that forming an LLC is not necessary because everyone trusts each other, but they fail to think about how they are exposing their personal assets to liability.
With a family LLC, families can get everyone in the family to participate in the ownership and management of family assets. Typically, a family member from an older generation will establish an LLC and keep the majority of ownership while dividing the rest of the ownership among other members of the family. For instance: Out of 100%, 70% is kept by the person forming the LLC and three children each receive 10% of the LLC. Over time, the majority owner will gift his interest to the children, will continuing to manage and control the LLC as the manager. In this way, the older generation can educate the children, maintain control, protect family assets, and protect personal assets.
An operating agreement lays out the rules that everyone involved must follow. Unlike an LLC formed by non family members, an operating agreement for a family LLC could include a clause that forbids family members from selling their LLC interests without the consent of other members. It may also forbid a family member from being forced to give their interests in the family LLC to a spouse in a divorce.
The LLC agreement could also require individual members of the family to contribute cash or other assets to the LLC to teach family members the benefits of saving. For instance, the LLC agreement could require each grandchild to contribute $10 to the LLC each month. Other provisions could limit the investments of the family LLC only to those that all family members agree, regardless of their interest.
The power of a family LLC lies in its ability to keep ultimate authority to make decisions with those who set up the family LLC while giving a voice to other family members. The managers are authorized to make day-to-day decisions while other members of the family such as (siblings, children, cousins, grandchildren) can weigh-in on decisions so that their voices can be heard. In addition, the power of a family LLC lies in its ability to easily transfer ownership of assets to younger generations in a tax efficient way, through gifting.
A family LLC's power comes from a well drafted operating agreement . The operating agreement is essential when the goal is to keep outsiders from taking control of the family business. The culture of collaboration that can be created by a family LLC can be a very powerful way to bring a family together.
Establishing a family LLC is a great way to accomplish a variety of goals. First, it can bring a family together so that they lear about managing investments. Second, it can teach family members the value of saving and investing. Third, it can create a tax efficient way to transfer wealth from one generation to another. Finally, it can separate and protect personal assets from business assets. Deciding if a family LLC is right for your family can be a difficult decision. If you decide a family LLC is right for you, you will need the assistance of a qualified and experienced attorney to guide you through the process. Please contact us to schedule a consultation with our experienced Colorado estate planning attorneys through the contact link on our website.