Structuring and operating a business is a complex challenge under the best of circumstances. When family members are part of the equation, the complexity multiplies many times. On the other hand, some of the world’s most respected brand names today started out generations ago as family businesses. The LLC in particular gives you the flexibility to structure the business in a way that takes these complex variables into account. In addition, the corporation or Limited Liability Company creates a wall of separation between your personal assets and the functions of your family business.
As owners or participants in a business, family members must confront a range of issues:
- Which family members “own” the business now?
- Which family members contribute the most value to the business?
- As the business grows, how will its ownership and management evolve?
- How will ownership transition smoothly and equitably to the next generation and to future generations?
Benefits of Incorporating Your Family Business in Delaware
- Limited liability
- Asset protection
- Homesteading & Insurance
- Delaware Family Limited Partnerships
- Delaware Corporations and Limited Liability Companies
- International Corporations
- Delaware Trusts
- International Trusts
- Offsets inadequate insurance
- Pass-through taxation (with S-Corp and LLC)
- Business deductions for losses and expenses
- Enhanced credibility with existing and potential customers
- Investor attraction
Many family businesses today are taking advantage of Delaware’s flexible LLC and close corporation laws. The flexibility of the Delaware LLC stems the way it allows business owners to establish what is known as a private operating agreement. This agreement is similar to a contract between family members. The contract sets forth the company’s governance structure and does not have to be filed with the State of Delaware; the arrangement is the personal, private business of you and your family.
In the operating agreement, you determine the rights and privileges of the members. Among a wide array of arrangements you can set up, the agreement can identify and separate owners from managers, define compensation arrangements, and mandate what will happen in the event one of the principals retires or dies.
A Delaware LLC can even allow for different classes of members: those who run the company, those who are employed by it, children of family members, and future generations. At the same time, a Delaware LLC provides your family with the benefits of pass-through taxation and limited liability.
The Delaware close corporation is meant for tight-knit groups such as a family. Its structure makes it very difficult for a (family) shareholder to transfer ownership to someone outside the family without the consent of the other family members. This is a way to ensure that business remains in the family as long as its members want it to. And, if the close corporation elects Subchapter S status with the IRS, it also enjoys the benefits of pass-through taxation and limited liability.
LLCs are a good choice to hold the assets because they are tax-free companies with strong liability protection. And, if they are set up properly, you won’t need to file separate tax returns for each LLC, which saves time and money. The family home is a personal asset. For further protection, your home should be homesteaded and insured. Homestead laws vary from state to state, so be sure to check with a local lawyer about the rules that govern your state’s homestead protection. In some states, you will need to register to be covered; in other states, there maybe a limit on the value you can protect.
If there is a family farm involved, protect it by placing it in a Family Limited Partnership (FLP). The FLP will allow you to maintain control, but will spread out the legal ownership. If you are sued personally, the farm won’t be sold to satisfy a judgment against you. In addition to being the first step in estate planning, Family limited Partnerships are also great asset protection plans.
The Start of the LLC
Three Easy Steps for Naming Your Company in Delaware
Opening a Bank Account for Your New Delaware Company
The Structure of the Limited Liability Company
101 on an LLC Agreement