Form a Family Limited Liability Company

Form a Family Limited Liability Company

Lower your taxes and create more wealth for your family

Under the new tax bill just passed by Congress, Pass-through Entities offer a generous tax break for service providers and entrepreneurs.  Are you an independent worker getting a 1099 instead of a W-2? Do you get paid individually or do you have a LLC or Sole Proprietorship that gets the checks? If the former is true, then you have been taking advantage of tax breaks that could accrue to you. The new tax bill offers even greater incentives for owners of pass through entities. The new tax law offers a 20% deduction from all Qualified Business Income if you make less than $15,500 for an individual and $31,500 for a married couple. In order to take advantage of this, you have to form an entity and get paid through the entity. This makes sense anyway for balance sheet building and tax deductions with or without the new tax break. 

An LLC has additional advantages over a proprietorship - consider these additional benefits;

  1. An LLC can shield you from liability in the event of a lawsuit
  2. An LLC offers you the opportunity to deduct business expenses such as automobile costs, office space in your house, lunches, seminars, clothing, etc.
  3. Profits in an LLC gives you the opportunity to value your business rather than just earn a large compensation as a 1099 service provider. To clarify, suppose you earn $120,000 a year providing computer services to a major company. The $120,000 compensation does nothing for your balance other than savings if any. Now suppose you form an LLC and let the LLC offer the services and you draw out $70,000 a year and allow the LLC to make a profit of $50,000 per year. The LLC market value at a 20% cap rate is $250,000. If you accept the funds as an individual you would only get a $50,000 balance sheet credit which is not capitalized. Why not empower your LLC so it can buy cars and real estate AND take classes with Strather Academy… haha.
  4. A LLC can shield you from being sued and having your assets confiscated. Your children can own all or the huge majority of the membership interest and you can have a Participating Promissory Note and take a % of the cash flow.
  5. The LLC offers you flexibility when selling the business or asset. You can sell the membership interest OR the asset.

Now, consider the added benefits of making it a family owned LLC.

  1. Suppose you have 3 children ages 4, 15 and 17 and they help you in the business. Your 4-year-old appears in commercials promoting your business and your teenagers helps with social media marketing, packaging and delivering the goods. Suppose you own 40% of the Family LLC and they own 20% each. A $50,000 profit would be allocated $10,000 to each of them and $20,000 to you. You will save taxes because they are in a much lower tax bracket than you.
  2. If your children own some of the LLC membership interest, they can pay for their own College education, Christmas toys, clothes and Car. Why send your kids to college with your after-tax dollars, let them accumulate the money in a lower tax bracket that is tax deductible for you.

By Herbert J. Strather CEO Strather Academy

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