Asset Protection for Family Business Owners

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 tenfold. On the other hand, some of the world's most respected brand names started out, generations ago, as family businesses.

As owners or participants in a business, family members must confront a host of issues ranging from family business succession planning to how to protect personal assets in the event of a lawsuit involving the business. Forming a Delaware LLC or corporation for your family business is a common way to protect both your personal assets and your business. Harvard Business Services, Inc. has more than three decades of experience forming Delaware companies for people who want to protect their assets, including members of family businesses. However, we are not a law firm and cannot give legal advice. Please consult an attorney if you need legal advice on this matter. We can, however, explain why a number of family businesses have chosen to protect their assets by placing their family businesses in a Delaware LLC or corporation, and point out some important factors to consider.

Family Asset Protection

Typically, the foremost reason that owners of family businesses incorporate is to legally separate their businesses from their personal assets. Even if a corporation is family-owned, you and your family will still have limited liability in the case of litigation. Usually, if you're operating your family business as a sole proprietorship and the business is sued, your home, cars, bank accounts and other personal assets could be at risk. Forming an LLC or corporation creates a barrier between your business and personal assets, which makes it more difficult for a plaintiff's lawyer to pursue your personal assets in the event of a legal proceeding involving your business.

Protection from Economic Downturns

In times of economic instability or downturns, businesses may face heightened risk from creditors or financial hardships. If the business faces financial challenges or becomes indebted, asset protection may often prevent creditors from going after family members’ personal assets. Applying an asset protection strategy typically helps safeguard the accumulated wealth of the family, ensuring that unexpected financial problems or legal disputes don’t erode the business or personal assets that have been built over time.

Establishing Ownership and Roles

When multiple family members are involved in a business, ownership can be confusing and even chaotic. This can become a problem in the event of a divorce or death of a family member. If, instead, you form a family-owned LLC, you can state ownership rights in your LLC Operating Agreement; likewise, if it becomes a corporation, your bylaws can clarify ownership rights as well as establish well-defined roles for family members who are involved in the company. With a family-owned corporation, you can also issue share certificates to memorialize the percentage of ownership of each shareholder in the family-owned company.

Personal PrivacyCertain asset protection structures allow family members to maintain privacy and keep ownership stakes confidential. For example, by placing assets in a Delaware LLC, the ownership details of those assets may not be publicly available.

Family Business Succession Planning

When a principal member of the family business retires or is no longer able to run the company, who will take over? A family business, whether it is a retail company or a farm, could slide into temporary disorder without a prescribed plan of succession in place. If you form an LLC for your family business, that question can and should be formally addressed in the Operating Agreement. This Operating Agreement is private and unique to each LLC-it is not submitted to the state of Delaware-and can help ensure the smooth transition of control after a principal member exits the company.

The Operating Agreement states the rights and responsibilities of the LLC's members, and is often classified into different classes within family businesses: Class A (the initial members), Class B (typically the offspring of the initial members) and Class C (typically the grandchildren of the initial members). Class B members generally have no initial rights or responsibilities in the LLC. When all of the Class A members have passed on, Class B members become Class A members, Class C members become Class B members and so forth.

These are only a few of the strategies you can use to protect your family business and personal assets, and ways of thinking about family business succession planning. Just keep in mind that forming a corporation or LLC to protect your assets will only work if you take care of your company and keep up with compliance. It would be wise to first consult with your estate planner and then rely on us to handle the details of filing and maintaining your company.

How to Incorporate Your Family Business

Ready to incorporate your family business? Forming a corporation or an LLC can ensure long-term success and sustainability of the family business, safeguarding both the business and the family's personal financial interests. First, choose the type of business entity that best suits your needs. Then simply click the button below to get started. If you have any questions about the process, we're available to help via phone (800-345-2677), email or live chat.