by Merlin Hernandez

Family-owned businesses are usually small, hands-on enterprises that are customer-oriented are often personality-centered. A major point of differentiation is the personal touch given by owners with family participation a necessary or desired element. These businesses often operate with a fair degree of risk that include size, location and competition, merchandise mix, perishables, target demographic, client profile, and promotional budget. Due to these and other risk factors, as well as the type of management that would be expected, I would rule out other business forms – sole proprietorship, general partnership, or corporation – in favor of a limited liability company (LLC).

Unlike sole proprietors and general partnerships, LLCs are separate legal entities from persons who own them and, in case of dissolution of the business; owners are not personally liable for business debts like bank loans, trade credits, business credit cards etc. LLCs are inexpensive to set up and do not normally require the services of an attorney. Member/investors are able to share in the profits and management of the business. Investors in a corporation are taxed on both corporate and personal levels. But LLCs afford owners the choice of having income or losses ‘flow through’ to individual tax returns thus avoiding the double taxation of corporations.

LLCs combine the best of general partnerships, limited partnerships, and corporations in that they can have both general partners and investors, manage their businesses themselves, can transfer, sell, or lease their property, and can operate at will (in perpetuity) or with a specified term. There is also ease of formation in that it only requires one or two members, with new investors entering the business without great formality. Capital contribution may take any form – money, personal property, services performed or agreements to contribute cash or property, and they can have multiple managers, including family and friends. LLCs may also have an unlimited amount of investors and can own subsidiaries, thus expanding access to capital and enhancing their collateral base to enhance fund raising capabilities.

By comparison, corporations are expensive to set up, are entities of their own, outside of their ownership, and governed by a board of directors which can take full control of the business. State regulations may preclude family members from serving on boards. They have a set management structure, with owners as shareholders who may not participate in the operations. They have limits to the amount of investors, often causing each investor contribution to be higher, and both corporate income and dividends are taxable.
In a family business, the family would usually prefer to retain control and the chosen business structure (LLC) should afford this.