What Is a Family Limited Liability Company (LLC)?

A family limited liability company (LLC) is formed by family members to conduct business in a state that permits such form of incorporation. The family LLC is a popular method to protect the assets of a family against claims by creditors, divide income among generations and provide opportunities to engage in estate planning.

A family LLC is formed by one family member who serves as the managing member, while other LLC members related by blood or marriage do not exercise control or management rights. The family LLC has an operating agreement that defines and restricts rights related to ownership and transfer of assets. A family LLC can be formed for legal business purposes, such as real estate and brokerage account management. However, a family LLC cannot be used to manage a personal residence.

A family LLC is typically costly to form and maintain and requires legal counsel who may need to be familiar with a family business. The legal fees may range from $3,000 to over $10,000, depending on the complexity of the arrangement of the family LLC. Also, a family LLC incurs expenses for annual meetings and fees associated with preparing and filing tax returns on a quarterly basis.

A family LLC is a useful tool to shield family assets from creditors' claims. The contribution amount of each member limits his debt liability of the family LLC. Members may be prohibited by an operating agreement of the family LLC from withdrawing and then reacquiring their interest in the company that can be later claimed by creditors. Other restrictions such as an absence of certain members' rights to vote or oust the management limit the ability of creditors to interfere and seize the assets of the family LLC.

A family LLC is widely used in estate planning. A family LLC's membership interests may qualify for lower appraisal values due to members' lack of control, resulting in lower taxes for the members.