Why a limited liability company (LLC) may be the right planning tool for a small, family-owned business.

Many sound business planning and non-tax reasons exist for forming a LLC as part of purposeful estate planning – in addition to tax reasons, but I’ll address those at a later date.

For a small family business that has been operated historically as a sole proprietorship or partnership, forming a LLC gives the family instant access to a clear path to planning for future transitioning and growth from one generation to the next.  The LLC form gives the older, more experienced generation the ability to exercise centralized management control over the business, while simultaneously planning for transition in the future.

Through the LLC structure – typically laid out in the operating agreement for the company – the managing members can plan for the development of younger members in the family business operation.  Specific provisions can insure that the business operation transitions as smoothly as possible from older members to children and grandchildren who have demonstrated an ability to continue operation of the business, by following the plan established.

Additionally, the LLC structure limits a family’s exposure to possible litigation and related legal claims, such as a conservatorship action.  Assets that are transferred into the LLC can be protected from such claims, and thus preserved as business assets for future generations.  In the instance of a conservatorship action regarding one member, the LLC form can assist the remaining members in maintaining control over the business operation and assets.  Without the LLC, especially in the instance of a sole proprietorship, all assets of the business can come under the control of the court and conservator in a conservatorship action – this can severely limit the ability for business development, growth and preservation for future generations.

In a similar way, the LLC form provides privacy and confidentiality for family members.  The operating agreement can set forth alternate methods of dispute resolution in the event of divorce or inheritance disputes, saving time and financial resources as well as keeping the dispute details out of the public forum that traditional litigation creates.

The LLC assets also can be managed more systematically through the LLC structure, which introduces a clear line of responsibilities and obligations between and among members.  Dissipation of assets can be mitigated through this formal structure, which simultaneously can be crafted to address the unique needs of a particular business and family owners.  Overall family unit can be fostered, as the family members work together to ‘grow’ the family enterprise.  This often has the additional effect of increasing the community presence of the family business through charitable gifts and service – which in turn only promotes the business in a positive manner.

Because the operating agreement – or structure of the LLC – is fluid, it can be amended as needed to address the changing requirements of the business and the family owners.  Thus, a LLC offers an ideal combination of structure and flexibility for a family owned business enterprise.

Advertisement