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.
Typically, the foremost reason that owners of family businesses incorporate is to legally separate their businesses from their personal assets. 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.
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 your family business becomes an 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. The corporation will also issue share certificates to memorialize the percentage of ownership of each shareholder in the family-owned company.
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. 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.
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