Is It OK to Form an LLC with Family and Friends
A lot of individuals think of starting a business with family and friends. The idea of working with people whom you know, like, and trust is appealing. After all, it may be easier to achieve success when co-owners share the same passion and dreams. However, doing that can be daunting as well. There are numerous horror stories out there of broken relationships due to disagreements when they form an LLC.
Having Structure When You Form an LLC
Generally, it is okay to form a business with family and friends. The problem is that it is possible to have contrasting strategies and different personal dynamics when it comes to co-ownership. Having a close relationship with co-owners can create an emotionally charged work environment. It may be challenging to keep business and personal relationships separate.
A good way to address that issue is to have structure. Many family-run companies suffer due to a lack of proper planning and a solid foundation. Setting up a structure will clarify the roles of each party and prevent disagreements and conflicts in the future.
Choosing an appropriate structure will also provide competitive advantages. The company can be sure that everyone is on the same page when it comes to the mission of the business, the strategies it will use, and the responsibilities of each owner.
Form an LLC
There are various business entity structures that companies can choose from. It is important to properly weigh the pros and cons of each before making a decision.
A good option for businesses owned by families and friends is the limited liability company (LLC). It is among the least complicated types of structures. It is easy to form and maintain.
Here are some of the benefits that an LLC offers:
· Asset protection for owners
· Pass-through taxation
· No double taxation
· Flexibility in ownership and management
· Freedom to choose how to distribute profits
What To Do
Aside from choosing the right structure, it is equally important to know how to ensure a good working relationship with friends and family. Here are some tips to follow:
· Communicate Properly
In any kind of relationship, communication is important. Make sure all parties understand what is going on and what they are supposed to do. For instance, leave the marketing to the one who has the best skills and knowledge about that aspect. Assign accounting to the person who is financially savvy. The most important thing is to make sure everything is clear.
- Decide on Ownership
It would also help to determine the percentage of ownership early on. Will the company split ownership 50-50?
- Create an Agreement
An important document for LLCs with multiple members is the operating agreement. While it may not be a requirement, it is highly advisable to have one.
The operating agreement will set out the rights, power, duties, and responsibilities of each owner. It also includes details on how to run the company, which include the processes that the LLC needs to follow for the management of the business operations. It can have provisions on how to add or remove members. Additionally, LLCs can define the rules on how the company will be dissolved.
Family LLC
For family-run companies, it is important to take note of a specific type of LLC. That is the family LLC. So what exactly is it?
It offers the same features as other types of LLCs. But, as its name suggests, it is an LLC formed by members related either by blood or marriage. Aside from being formed for business purposes, a family LLC can also own rental properties and brokerage companies. One advantage of this form is that it allows one to keep assets in the family. It is possible to transfer assets to other family members while reducing taxes for that person and their family members.
Getting Started
To form an LLC, a company has to go through a process that the state has set. The requirements and fees will vary depending on where the owners decide to organize their business.
Typically, the state will require the submission of formal paperwork and payment of the corresponding fees to the governing agency. In most cases, the document is referred to as the Articles of Organization or Certificate of Formation. The state process may also require the completion of multiple steps such as choosing an appropriate name, appointing a registered agent, and obtaining necessary licenses and permits.
To learn more about the steps on how to form an LLC, contact a reliable third-party organization like DoMyLLC. Our team of experts can help streamline the whole ordeal and provide a hassle-free experience.