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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. Yet some of today’s oldest and most respected companies started out generations ago as family businesses, and many of these business are now among the wealthiest and most successful companies in the world. Consider these remarkable family businesses and their overall worth: Hearst (publishing, 35 billion); DuPont (chemicals, 15 billion); Brown (liquor, 11.6 billion); Gallo (wine, 9.7 billion); LeFrak (real estate, 6.5 billion); Marriott (hotels, 5.7 billion); Nordstrom (department stores, 3.7 billion); Steinbrenner (N.Y. Yankees, 3.1 billion); Bean (catalog clothing retailer, 1.8 billion).
The LLC, in particular, offers family businesses the flexibility to structure their companies in a way that takes complex variables such as family dynamics into account. However, both a corporation or a limited liability company (LLC) create a barrier of separation between your personal assets and the assets of your family business.
As owners or participants in a business, family members must confront a range of issues:
Many family businesses today are taking advantage of Delaware's flexible LLC and close corporation laws. The flexibility of the Delaware LLC stems from the way LLCs allows business owners to establish private, internal agreements, known as Operating Agreements. An Operating Agreement is similar to a contract between family members. The contract sets forth the company’s governance structure, and it 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 can determine the rights and privileges of the members of the LLC; you can identify and separate owners from managers, define compensation agreements, mandate what will happen in the event one of the LLC's principals retires or passes away and outline a wide variety of other arrangements.
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 of children of family members. At the same time, a Delaware LLC provides your family with the benefits of pass-through taxation and limited liability.
LLCs are a good choice to hold the family business' assets because they are tax-free companies with strong liability protection. In addition, if they are set up properly, you won't need to file separate tax returns for each LLC, which saves time and money. Since the family home is a personal asset, 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 may be a limit on the value you can protect.
The Delaware close corporation is meant for tight-knit groups, such as family businesses. 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 reliable way to ensure the 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.
If there is a family farm involved, you can 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 can'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.
Harvard Business Services, Inc. can help you decide how to set up and protect your family business. You can get in touch with us in a variety of ways. Just follow this link to contact us by phone, email or live chat: https://www.delawareinc.com/contact-us/
Source: "Dominant Dynasties." Forbes. July 2014: 78-88. Print.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.