Anaya Nolan
Yes, you can form an LLC with your brother-in-law. An LLC, or Limited Liability Company, is an entity created by state statute that protects your personal assets from business lawsuits and liabilities. The members of an LLC can be anyone from family to friends and business partners. The LLC can be structured as a single-member or multi-member entity, and it is up to you to decide how much of the LLC each member will own and how profits and losses will be distributed. It is recommended that you consult an attorney to help you draft the agreement.
| Characteristics | Values |
|---|---|
| Number of members | There is no limit on the number of members in an LLC. The state does not differentiate between a single-member LLC and a multi-member LLC. |
| Members | Members can be family, friends, partners in your business, or anyone you want to be a part of your legally formed entity. |
| Management structure | LLCs have a flexible management structure, allowing owners to shape the LLC to meet the business's needs. |
| Ownership | Ownership is determined by the operating agreement, which may be entered into before, at the time of, or within 90 days of filing the Articles of Organization. |
| Tax treatment | LLCs are treated as corporations, partnerships, or part of the owner's tax return (a disregarded entity), depending on elections made by the LLC and the number of members. A multi-member LLC is classified as a partnership by default, but can elect to be treated as an S corporation. |
| Formation | To form an LLC, organizers must prepare, sign, and file the Articles of Organization. |
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What You'll Learn
LLC formation with family members
Yes, you can form an LLC with your brother-in-law. The IRS does not recognize an LLC made up of family members to be a legal entity distinct from any other LLC. In other words, a family LLC is subject to the same rules and regulations as a non-family LLC.
When forming an LLC, you must file LLC formation documents with the Secretary of State's office or whichever department handles business filings in the state in which you are forming. This document is commonly referred to as a Certificate of Organization, Certificate of Formation, or Articles of Organization. The filing fees vary across the U.S. and are typically not more than $100.
For a family LLC, the operating agreement should list your family members and prevent transfers of membership interest to non-relatives. This ensures the family LLC remains family-owned. The operating agreement should also detail the division of ownership, labor, and profits, and often heads off disputes among the owners. It should detail who has the authority to do what, what vote is required to approve certain transactions, how membership interests can be transferred, how new members can be added, and how distributions, profits, and losses will be split.
LLCs are treated as corporations, partnerships, or as part of the owner's tax return (a "disregarded entity"), depending on the elections made by the LLC and the number of members. A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation.
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LLC tax implications
Yes, you can form an LLC with your brother-in-law. The state does not care who you list as members of your LLC, and the structure of your LLC is up to you. You can set up an LLC with an operating agreement that designates different ownership and management/decision-making rights for each member.
The tax implications of an LLC depend on whether it is a single-member or multi-member LLC. A single-member LLC is treated as a disregarded entity, separate from its owner, for income tax purposes. The individual will use Form 1040 to report income generated from the business and Schedule C to report expenses.
A multi-member LLC, on the other hand, is classified as a partnership for federal income tax purposes. The LLC files Form 1065, U.S. Return of Partnership Income, on which it reports profits, losses, credits, and deductions related to the business. Each member of the LLC then receives a Schedule K-1 document, which they use when filing their own taxes to show their share of income, credits, and deductions received from the LLC.
LLCs are considered "pass-through entities," meaning the LLC itself does not pay federal income taxes on business income. Instead, income "passes through" to individual members of the LLC, who pay federal income tax on the income earned from the LLC via their own individual tax returns. This is how LLCs avoid double taxation, which is taxation at both the federal and individual level.
If an LLC has employees in addition to its members or owners, it must collect and pay payroll taxes, including unemployment, Medicare, and Social Security taxes, also known as FICA taxes. Unemployment taxes are paid by the LLC, which must file Form 940 by January 31 of the tax year, and payments are made by the last day of each subsequent month during the quarter. To pay Social Security and Medicare taxes, the LLC files Form 941 on the last day of the month following each quarter, and taxes are generally paid on a monthly or semi-monthly basis.
LLCs can also be taxed as corporations if they file Form 8832 and elect to be treated as such. In this case, normal corporate tax rules will apply, and the LLC should file Form 1120, U.S. Corporation Income Tax Return.
Other tax considerations for LLCs include franchise taxes, sales taxes, and use taxes. Franchise taxes are imposed on LLCs for the privilege of being incorporated in a state, and sales and use taxes depend on the type of transaction and whether the seller or buyer pays. Additionally, property taxes may be incurred, which are often used to fund local governments.
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LLC management and ownership
When forming an LLC, it's important to understand the different management and ownership structures available. LLCs offer flexibility in terms of management and ownership, allowing you to create a structure that suits your specific needs.
Management Structures
There are two main management structures for LLCs: member-managed and manager-managed. In a member-managed LLC, all members (owners) actively participate in running the business and making decisions. This structure is common when members want to be directly involved in the day-to-day operations of the company. By default, most states consider an LLC to be member-managed unless otherwise specified.
On the other hand, a manager-managed LLC delegates the day-to-day operations to a third-party manager, who may be an experienced professional. In this structure, the LLC members play a more passive role, and the manager has the authority to act on behalf of the LLC.
Ownership Structures
LLC members can adopt various ownership structures, and the operating agreement allows for flexibility in naming LLC members. Ownership in an LLC is typically set forth in percentage ownership or units, and these owners are called members. The operating agreement outlines the rules and responsibilities for running the company, including each member's ownership percentage and their rights and duties.
It's important to note that LLCs can create different classes of members with varying voting and management rights based on factors like total ownership interest, capital contributions, or management responsibilities. Additionally, a single-member LLC is also possible, where one person owns and manages the company.
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LLC operating agreements
Yes, you can form an LLC with your brother-in-law. When forming an LLC, you can include family members, friends, business partners, or anyone you want to be part of your legally formed entity. The state does not care who you list as members of your LLC, but they should be people you trust as they will be part of your business, your finances, and your reputation.
An operating agreement is a legal document that outlines the structure, management, decision-making process, and operating procedures for an LLC. It is a contract that, once signed, binds the LLC members to its terms. The document outlines the business's financial and functional decisions, including rules, regulations, and provisions. It lays out how the LLC will be managed, how much of the LLC each member will own, and how profits and losses will be distributed by the members.
The benefits of having an operating agreement include shielding LLC members from liability, providing clarity on the rules and operations of the business, and allowing for customization to the specific needs of the LLC. It also helps to show the court the legitimacy of your business and lends credibility to you as a business person if you ever end up in court.
The drawbacks of an operating agreement are the expense of creating and implementing the agreement, increased formality, and greater administrative duties. However, these downsides are generally considered to be outweighed by the advantages of having an operating agreement.
Operating agreements are generally between five and twenty pages long, and while they can be longer, the best ones are clear and simple in what the rules are and how they will be executed. They do not need to spell out every step, but they should be as comprehensive and specific as possible.
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LLC formation in New York
Yes, you can form an LLC with your brother-in-law. In fact, you can form an LLC with anyone you choose, including family members, friends, or business partners. The state does not care who you list as members of your LLC, and the structure of your LLC is up to you.
Now, here is a step-by-step guide to forming an LLC in New York:
Step 1: Pick a Name
The name of your LLC must include the words "Limited Liability Company" or the abbreviation "LLC" or "L.L.C." It must be distinguishable from the names of other LLCs, corporations, or limited partnerships on file with the Department of State. There is a list of words and phrases that are prohibited or restricted in the name of an LLC, and certain words and phrases require consent or approval from other state agencies prior to filing. You can search for name availability on the New York State Executive Law website for a $5 fee per name submitted.
Step 2: Get a Registered Agent
The LLC must designate the New York Secretary of State as its agent for service of process and provide an address to which the Secretary of State may mail a copy of any legal process received.
Step 3: File Paperwork
You will need to complete and submit the Articles of Organization to the New York Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231, along with a $200 filing fee. The Articles of Organization must include the name of the LLC (typed exactly the same in all three places it appears on the form), the county within New York State where the LLC's office will be located, and the signature of the organizer. You can also file the Articles of Organization online.
Step 4: Operating Agreement
The Operating Agreement is the primary document that establishes the rights, powers, duties, liabilities, and obligations of the members between themselves and with respect to the LLC. It is an internal document and is not filed with the Department of State. You may enter into the Operating Agreement before, at the time of, or within 90 days after filing the Articles of Organization.
Step 5: Publication Requirement
Within 120 days of forming your LLC, you must publish a copy of your Articles of Organization or a notice announcing your LLC formation in two newspapers (one weekly and one daily) for six consecutive weeks in the county where your principal business address is located. After the six weeks, the newspapers will mail you an Affidavit of Publication, which you must submit to the Department of State along with a Certificate of Publication and a $50 filing fee.
Step 6: Biennial Statement
Every two years, LLCs in New York are required to file a NY Biennial Statement with the Department of State to keep the state informed about who owns your LLC and how to contact you. The first Biennial Statement is due during the anniversary month of the company's formation two years after its formation. For example, an LLC formed in January 2024 would need to file its first biennial statement during January 2026. The state filing fee is $9.
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Frequently asked questions
Yes, you can form an LLC with your brother-in-law. The members of an LLC can include family, friends, business partners, or anyone you want to be part of your legally formed entity.
An LLC, or Limited Liability Company, is an unincorporated business organization of one or more persons with limited liability for the contractual obligations and liabilities of the business.
Forming an LLC with your brother-in-law can provide benefits such as shared responsibility for business successes and failures, co-management with someone you trust, and ease of communication. Additionally, an LLC offers flexibility in ownership and management structures, and your brother-in-law can have a stake in the business.
To form an LLC, you will typically need to prepare and file Articles of Organization, which may include designating members of the LLC. Some states may require listing all members, while others do not. It is recommended to consult an attorney experienced in creating LLCs to ensure compliance with specific state requirements.
