Updated July 1, 2020:

People often ask what is a family LLC when they want to start a business with their family members. It's important to know the legal implications of a family LLC and the benefits before starting one. A family limited liability company, also called family LLC is a type of business or investment entity ownership that offers its owners improved protection from the business entity's liabilities and generous estate and gift tax benefits.

What Is the Difference Between Family LLC and Regular LLC?

The only difference between a family LLC and regular LLC is that only people with blood or marriage relations can form a family LLC.

What Is the Purpose of an Operating Agreement?

The enhanced protection enjoyed by owners of a family LLC is due to a restrictive operating agreement which clearly defines and limits ownership and transfer rights.

The operating agreement of a family LLC defines its daily activities. It can be prepared by the families themselves, by an attorney, or through an agency that provides legal document services.

What Is the Difference Between Family LLC and Regular LLC?

A Family LLC usually own rental properties, brokerage companies, and a portion or all of the family's business operations. On the other hand, an LLC can own anything, except for a personal residence which cannot be owned by a business entity as it violates its tax status.

How Does a Family LLC Provide Asset Protection?

A family LLC is protected from a charging order, allowing you to negotiate from a position of strength if a creditor with a charging order tries to force you to pay distributions through your LLC. Thus, you can settle the matter out of court.

Advantages of Operating Agreement

  • Operating agreement restrictions protect your possessions from the reach of creditors.
  • Restrictive operating agreements can discourage creditors from trying to disrupt your LLC's operations through a charging order.
  • They protect your LLC assets from creditors by making it extremely hard for them to interfere in your business operations.

What Are the Types of Restrictions in an Operating Agreement That Are Appropriate?

The types of restrictions in an operating agreement include:

  • Members are not allowed to withdraw or reacquire contributions from the company which creditors can seize.
  • Members are prohibited from management activities or terminating the appointment of the management team.
  • Members are not allowed to attempt a split or dissolution of the company without the approval of the entire management and ownership of the company.

This will make it difficult for a creditor with a charging order to interfere with the LLC operations and make it easier to opt for an out of court settlement.

How to Strengthen the Structure of an LLC

Strengthening the structures of a family LLC is achieved by selling or gifting ownership interests to other family members either in trust or outright.

Should an LLC Be Registered in a State with Protective LLC Laws?

The LLC has to be registered in a state that has protective LLC legislation.

Is There a State That Limits the Rights of Creditors?

Some states place extreme restrictions on creditor rights regarding LLCs registered to do business in the state. For instance, Wyoming prohibits creditors from gaining access to the records and books of an LLC and the company's Articles of Organization may not disclose the members or managers.

Why a Family LLC Is Usually Considered as a Partnership

The reason for this is that a family LLC is treated as a pass-through entity like a partnership, and the profit and losses of the company are passed on to the members.

Does the Contribution of Business or Investments Assets to the Family LLC a Taxable Event?

The contributions of business or investment assets to the family LLC are exempt from tax.

Can a Family LLC Be Eligible for a Large Discount for Property and Gift Tax Purposes?

A family LLC may be eligible for large discounts for estate and gift tax.

Do You Need a Lawyer for Establishing a Family LLC?

An attorney who is experienced in forming family businesses is needed when starting a family LLC.

If you need more information about what is a family LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.