Family Businesses: A San Diego LLC is a Good Choice
Family-run businesses are unique and have their own special needs. Forming a San Diego limited liability corporation (“LLC”) can help by:
- Protecting the family assets
- Clearly identifying management responsibilities
- Providing for succession of management
- Estate planning
Family businesses are some of the best businesses. They often start small and then grow over time along with the family. The family bond is natural and tight. Working with family can be so much more rewarding than the drudgery of a “normal” job. But, there are some risks involved as well.
Why is a California LLC a Good Choice?
Here are several reasons why forming a California LLC is a good choice for your family business. Keep reading to see what some of those reasons are.
Protecting Family Assets
Many family businesses start small and are run as sole proprietorships or partnerships. As such, all family assets are at risk to pay for business debts and obligations. If you form an LLC (or a corporation), the LLC shields non-business income and assets from being taken by your business creditors in the event that the business fails.
Between a corporation and an LLC — both of which provide asset protection — the LLC is often a good choice because it provides flexibility and has fewer formalities. An LLC does not need a Board of Directors or meeting minutes. Moreover, your custom-drafted operating agreement can specify who is running the company, how profits are distributed, and how various rights and responsibilities are assigned to various members of the family. Mom and Pop, for example, can be assigned the management responsibilities while the kids have an ownership interest but, maybe, no voting rights or rights to profits. This, of course, can be changed over time.
Pass-Through Tax Treatment
Additionally, as between a corporation and an LLC, the LLC is often a good choice because it provides “pass-through” tax treatment which is advantageous for all family members without the hassle and expense of running payroll as is required by an S-Corp, which is another entity option providing pass-through taxation.
Your custom-drafted LLC Operating Agreement can also outline specific rules of management succession for the family business in the event that Mom or Pop cannot carry on the business or want to retire. Such can be very important for “managing expectations.”
Adding Family Members
Likewise, your Operating Agreement can also outline specific rules for how new members can be added to family business. Again, such can be important for managing expectations of new spouses, extended family, and family members who are growing up and, maybe, just finishing college.
Unlike partnerships or sole proprietorships, LLCs continue to exist even if one member of the LLC passes away. Thus, at a minimum, the LLC form allows the family business to continue operating if some tragedy or something unexpected occurs. In addition, the LLC form can help avoid the need to probate an estate and, if done correctly and in compliance with tax laws and regulations, the LLC can be used to help reduce inheritance and gift tax burdens. You will need to consult talented tax professionals, but the basic idea is this: In general, you can transfer ownership of your LLC units to your children or grandchildren as you see fit. When gifting LLC units, the gift tax is based on the market value. Non-voting units can, under the tax regulations, be steeply discounted in value for purposes of tax determination. Just as importantly, if properly set forth in the Operating Agreement, you still maintain control of the LLC even though you have passed some ownership units to other members of the family. The prevents your wealth from being “wasted.” The tax and estate planning rules are complicated, so, again, advice and guidance from experienced tax and legal professionals is essential.
Contact San Diego Corporate Law
For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to help you create your family LLC, can draft your Operating Agreement to the specific and unique needs of your business and can assist with any other business-related legal matter. Contact Mr. Leonard by email or by calling (858) 483-9200.