Family LLC Operating Agreements

By Chris Blank

Many families that have accumulated sizable assets are concerned about how to preserve their estates for their children, grandchildren and future descendants. A family limited liability company is one means to ensure that a family enterprise, such as management of a parcel of forest woodlands, can continue even after some family members have passed away. A family LLC operating agreement spells out its day-to-day operations. Families may draw up LLC operating agreements on their own, with the help of an attorney or by using a third party legal-document service.

Structure of Family LLCs

Transferring assets such as patents, museum quality art or large parcels of land owned by an individual family member into a family LLC often shields those assets from federal estate taxes. The Internal Revenue Service recognizes the legitimacy of such transfers made to allow joint management of assets, combine assets to maximize investment potency or facilitate transfers of assets to heirs. Additionally, LLCs shield their members against personal liability for company transactions. The IRS does not recognize LLCs as separate business structures; family LLCs are either partnerships or corporations. LLCs that are not incorporated have members rather than stockholders. Family LLCs that are incorporated may form a conventional C corporation or an S corporation -- the latter is a business structure for a small corporation that allows the LLC to avoid corporate income tax, while providing shareholders exemption from self-employment tax.

Articles of Organization Versus Operating Agreements

Operating agreements differ from articles of organization, which are documents filed by the family LLC with the state where the LLC is established. Articles of organization are public documents and include such information as the name of the LLC, the name of the person registering the LLC, how long the LLC is intended to be in operation and the names of any agents acting on the LLC's behalf. Operating agreements are shared only with members of the family LLC and form the contract for its operation. The operating agreement also addressed such factors as what percentage of LLC assets each family member owns, how voting is handled for resolving LLC issues, changes of membership within the LLC and transferring LLC assets.

Ready to start your LLC? Start an LLC Online Now

Management of Family LLCs

Operating agreements for family LLCs formed to avoid estate taxes often set a term of existence of 100 years or more to make it easier for an estate to remain intact, as opposed to at-will LLCs that exist until family members vote to dissolve them. Many family LLCs are managed by a single member, often an elder member of the family. In such cases, the operating agreement for the LLC often includes provisions for replacing the manager when the need arises. An important aspect of the operating agreement of a family LLC is that it determines how many members are necessary to form a quorum, that is, sufficient representation of the entire LLC membership to allow a valid vote to take place. Without such provisions, family disputes can bring the operation of the LLC to a halt.


Properly drafted and executed operating agreements are essential in protecting the assets of a family LLC from federal estate taxes. In Hackl v. Commissioner, a 2002 case, the U.S. Tax Court found that a family LLC had failed to demonstrate that its assets should be exempt from estate taxes. The operating agreement for the LLC included no provisions for replacing the LLC's manager, a family member appointed for life who had nearly unlimited latitude in deciding how to distribute the LLC's assets. By contrast, in Mirowski v. Commissioner, a 2008 case, the U.S. Tax Court found that the widow of the heart defibrillator implant's inventor had demonstrated "legitimate and significant non-tax reasons" for establishing a single-member LLC. In that case, assets transferred from the LLC into trusts established for her three daughters were allowed to remain exempt from federal estate tax liability.

Ready to start your LLC? Start an LLC Online Now
Does an LLC Entity Have to Have One Manager?



Related articles

What Is the Difference Between a Series LLC & a Restricted LLC?

The relative newness of the limited liability company business structure has allowed some states to create innovative types of LLCs that offer unique business options and special tax benefits. The series LLC and restricted LLC are among these innovations. LLCs in general are formed under state law and combine the tax benefits of a partnership with the limited liability of a corporation. Each state has its own LLC statute that contains similar but not identical provisions.


FLPs, or family limited partnerships, are similar to LLCs, or limited liability companies. However, there are some differences that may make one option better than the other. If your organization is not a family business, you may prefer the LLC structure. However, even if your entity is a classic family enterprise, with its potentially important restrictions, you may or may not prefer the FLP structure.

Kentucky LLC Laws

Chapter 275 of the Kentucky Revised Statutes sets out Kentucky’s laws for limited liability companies, or LLCs. An LLC is a business entity that combines advantages of corporate liability limitations with flexibility in taxation and management. To organize an LLC in Kentucky, owners must file all appropriate paperwork and fees with the Kentucky Secretary of State.

LLCs, Corporations, Patents, Attorney Help

Related articles

Can Forming an LLC Protect Your Personal Property?

The limited liability company is one of several types of legal entities that people often use to protect their personal ...

Advantages of Forming an LLC in Nevada

A limited liability company (LLC) is a form of business organization that offers limited liability and no double ...

Family Trust Vs. LLC

A family trust and a limited liability company, or LLC, are both created under state law, but they are two very ...

Operating Agreement for a Single-Owner LLC

The owners of an LLC are known as members. An operating agreement for a single-owner/member LLC is an important ...

Browse by category
Ready to Begin? GET STARTED