A Limited Liability Company (LLC) is a frequently-used business entity that provides liability protection to confine any at-risk assets to just those of the LLC. Personal assets of an LLC owner are protected from business risks. A Family Limited Liability Company (FLLC) is a legal entity for business planning, while also serving as an estate planning tool. The main business goals are to provide management experience for younger generations, restrict who may acquire a direct interest in the family business and prevent fragmentation of the family business. From an estate planning perspective, an FLLC can help reduce estate and gift taxes and protect assets from creditors.
As a business planning tool, an FLLC allows parents to employ a younger generation in the business while training them to transition into ownership and management. Combining the FLLC structure with a revocable trust provides a mechanism for turning the family business over to children who are interested in staying in the business, while distributing other assets to children not interested in the business.
Generally, an FLLC will have an operating agreement that details how the business entity will be managed, who has what percentage of ownership, who has what responsibilities for management, how voting is conducted, and the procedures for winding up the business. Parents as the senior managers can also restrict the children from selling their interest in the FLLC to a third party, and can determine how shares may pass to other family members through inheritance. Parents may also create a Buy-Sell Agreement. If a child attempts to sell interest in the business (or the child divorces, dies, or becomes disabled), the Buy-Sell Agreement allows the FLLC to purchase the child’s interest. If the FLLC declines to purchase the interest, other FLLC members may purchase the interest. The objective is to retain ownership only in the family
An FLLC is a common way to own real estate such as a beach or lake home that the family wants to make available to multiple family members over an extended period of ownership. This is preferable to transferring the same property directly to the children of the family, with each child receiving a fractional interest. With the passage of time, the individual interests become more fragmented. Structured properly, with a good operating agreement in place, the FLLC will continue to retain title to the property, and only the ownership of the member units of the FLLC changes as future generations inherit.
FLLCs also provide protection from creditors and in case of a divorce in the family. An FLLC will protect the family business from creditors of individual family members, since creditors are limited to obtaining a “charging order” against the FLLC ownership interest and are not able to take over the management of the business. Similarly, if a creditor of the FLLC sues the FLLC, the individual family members are not personally liable.
An FLLC can also minimize or eliminate estate and gift taxes for high net-worth families. Consider that a parent creates an FLLC with investment assets and gifts voting and non-voting shares to family members as a commonly-managed family investment vehicle. As long as there are valid business and non-tax reasons for the FLLC structure, the family interests can be valued, with a discount allowed for lack of marketability and lack of control. If the family assets approach the current estate and gift tax exemption (Currently $11.4 million per person), the parent can make gifts of additional member units to the children at the discounted rate, and reduce the parent’s taxable estate to under the exemption amount without triggering gift taxes.