A business’ success relies on several variables, one of which is the company’s structure. It is crucial for the business’ goals and priorities to be perfectly aligned with its entity. This is because an entity’s formation also dictates a company’s liability extent and tax responsibilities.
Family owners who want to operate a business will definitely consider the familial relationship when selecting its business entity. Here are a few things you should note about choosing a structure for your family business.
Limited Liability Company (LLC): a common option
Although other entities are available to family businesses, they are commonly structured as LLCs. One of the reasons why LLC is a popular option is because of the liability protection it offers. With LLC, in case something goes wrong and the business gains debts or faces a lawsuit, the individual members will not be personally liable for the same.
A simpler reason why family companies choose LLC is the ease of transfer of business from one generation to another and the preservation of wealth within the family.
There is no one-size-fits-all entity
Of course, while members commonly form their family businesses as LLCs, it is not necessarily the appropriate entity for all family companies. Business owners must consider several factors, especially those unique to their situation. These considerations include, but are not limited to, the following factors:
- Ownership and management
- Capital sources and business profitability
- Business goals
- Liability protection
- Tax priorities
- Ease of formation and maintenance
While it is not a guarantee, entity formation plays a crucial role in a business’s success. Understanding your business goals can help you select the appropriate entity for your company. If you have doubts as to what entity best aligns with your business, consulting a legal professional can help you narrow down your options.
