This article explores what makes using family LLCs in estate planning a valuable option for small business owners. To speak with an attorney about how an LLC can help you plan your estate, reach out to Beller Law, PL. We have 25 years of experience helping individuals and families determine the best ways to achieve their unique estate planning goals.
How Do LLCs Work?
Most people know that an LLC is a limited liability company. But what does limited liability mean? And what does it take for an entity to be a company?
Company
A company may refer to several different business entities. Companies must operate for a business purpose, which generally means attempting to make a profit.
Businesses can be formed out of one of several structures, including:
- Sole proprietorships,
- Partnerships,
- Limited liability companies, and
- Corporations.
A limited liability company is a legal business entity owned and operated by members. Unlike corporations, LLCs are privately held and cannot be publicly traded.
Limited Liability
Limited liability companies get their name from the limitations they put on the liability of their personal assets of their members (owners). But what does limited liability mean in practical terms? In short, the owners of a limited liability company typically cannot be held personally responsible for the business’s actions.
Consider an LLC that sells kitchenware. A customer buys a faulty blender from the LLC and gets injured using the appliance. If the customer sues, they can generally only sue the LLC, not the LLC’s owners. Furthermore, they can only recover LLC assets, shielding the owners from having to pay lawsuit-related judgments or other company debts out of their personal assets.
What Is a Family LLC?
A family LLC is owned and operated by members related by blood, marriage, or adoption. Like any LLC, a family LLC must be operated for a business purpose. Indeed, the Internal Revenue Service (IRS) does not regard family LLCs as legally distinct from other LLCs. However, it may opt to scrutinize family LLCs to ensure that the company is a proper business and not a tax avoidance strategy.
To create a family LLC, you:
- Select a name,
- Create an operating agreement, and
- File articles of organization with the State of Florida.
Typically, one individual or a small group is responsible for running the business, while the other LLC members hold assigned ownership interests. You establish how much control each member has over the business when you create its foundational documents.
If you want to convert an existing business into a family LLC, your options depend on its structure and ownership. You may have to register a new company and determine how to transfer business property from the old entity to the new one. If the business is already an LLC, you may be able to add your family as LLC members. If any non-relatives have ownership interests, you may need to renegotiate some of the operating terms.
How Can a Family LLC Help You Plan Your Estate?
Many small business owners overlook the importance of succession planning in their estate plans. Family LLCs establish a succession plan while being one of the strongest small business estate planning asset protection strategies. They allow you to direct what happens to your business after you are gone. Additionally, because they are not subject to probate, establishing a family LLC or converting your existing business into one allows your business to bypass probate.
Estate Law Background: Probate and Non-Probate Assets
Generally, assets are probate or non-probate. Probate assets include, but are not limited to:
- Sole bank accounts,
- Real property, and
- Intellectual property.
Non-probate assets include, but are not limited to:
- Trusts,
- Joint bank accounts, and
- Life insurance policies.
Principally, an asset is subject to probate if it does not contain an internal way to transfer ownership upon the current owner’s death. Non-probate assets are transferred without a will upon the current owner’s death.
The Value of Non-Probate Assets
The distinction between probate and non-probate assets is significant for several reasons. Probate assets cannot be distributed except through the probate process. Assets distributed through probate face the potential of high estate taxes. Probate also moves slowly, especially if the decedent was disorganized or there are any challenges to the will. Non-probate assets allow individuals to bypass the timely probate process as well as many of the taxes and fees that they might otherwise owe.
Why Use a Family LLC?
With a family LLC, you can bypass probate, clearly direct your business wishes, and minimize the taxes your estate will need to cover. You can establish:
- Who shares in the business’s ownership,
- How much each member owns,
- What power each member has over business operations, and
- What responsibility each member has for the business.
In addition, you can create contingencies for what happens when you die or if you can no longer run the business. You may address who takes over and what, if anything, should change to make that happen.
By setting terms for what will happen within the business’s documents, you create a mechanism for assets to pass without going through probate. As a result, a family LLC can save time, money, and stress, for you, your family, and those your business serves.
Reach Out to Beller Law, PL
Maximizing your ability to meet your estate goals typically requires consultation with an experienced, knowledgeable estate planning attorney. If you are wondering about the potential for using LLCs in estate planning, reach out to Beller Law, PL. We can talk you through your options to help you determine whether a family LLC is right for you. If you decide it is, we can help you design your estate plan around this powerful estate planning tool.