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Family Investment Companies Are Fantastic!

Posted: April 26, 2021

As a practicing lawyer for over 30 years, I am well aware of the many benefits associated with limited liability companies (LLCs).  But the secret is out and LLCs are becoming the entity of choice for many new businesses.

The popularity is well founded.  As I explain below, LLCs offer a high degree of customization and flexibility.  One of my favorite strategies is using an LLC to serve as the registered owner of an investment portfolio.  In this article I refer to such LLCs as “family investment companies”.

An LLC is an entity that combines several of the best attributes of sole proprietorships, partnerships, corporations and trusts.  Establishing an LLC is easy.  The only requirement is filing articles of organization in the state of registration.  There’s a fee, but it’s usually modest -- just $130 in Wisconsin, for example.  Given the streamlined process, legal assistance isn’t always necessary.

An LLC will typically have an operating agreement, which describes how the entity will be managed; outlines the rights and duties of the members; and defines how shares (membership units) can be transferred, sold or cashed in.  If an LLC has multiple members with competing interests, I suggest obtaining legal assistance for crafting this document.

There are no minimum or maximum number of LLC participants (also called members).  Responsibility for overseeing the LLC can reside in one person or shared among the members.  It is not necessary for an LLC to have officers, directors, or trustees, and meetings of LLC members are optional.

Keeping an LLC in good standing is easy too.  In most states, all that is required is filing an annual report with the state of registration.  These reports are usually very brief and oftentimes fit on a state-provided post card.  In Wisconsin, all that is required are updates (if any) to the addresses for LLCs or its registered agent, along with a $25 filing fee.

Establishing a family investment company as the registered owner of an investment portfolio can have several significant advantages over personal ownership or ownership by a trust.

  • A family investment company allows family members to pool their investments within a single LLC. This can allow the family to take advantage of investment opportunities that might not otherwise be available to an individual acting alone.  It can also place control of the portfolio into the hands of those who are the most knowledgeable about investment management.
  • Having a larger investment pool can lessen management fees and facilitate better diversification. When there is more money to invest, a greater range of investments are possible.
  • LLCs are not taxed on their profits or capital gains. Rather, profits and gains are taxed to members in proportion to their ownership percentage, at the members’ personal tax rates.  As a result, taxes on a family investment companies’ income and gains can be lessened if family members whose income is taxed at lower rates own membership units.  By comparison, trusts reach the highest federal marginal income tax rate at much lower thresholds than individual taxpayers, and therefore generally pay much higher income taxes (unless the trust is revocable).
  • A family investment company permits gifts of an undivided interest in an investment portfolio. Rather than having to sell an investment to raise the cash to make a gift, LLC membership units can be gifted.  As a result, capital gain taxes can be avoided.  Similarly, a family investment company can allow family members to jointly inherit an investment portfolio without the need to divvy up or liquidate membership units.
  • A person who receives membership units in a family investment company does not have to decide how to invest his or her gift or inheritance. Better yet, the recipient can be prevented from spending the gift unwisely, since LLC units typically can’t be converted to cash without the consent of the LLC manager.
  • A family investment company’s operating agreement can establish parameters on how the LLCs assets can be invested. For example, the LLC’s operating agreement could provide that no more than x% of the LLC’s funds be invested in stocks, or forbid the LLC manager from investing in risky assets such as junk bonds, penny stocks, or cryptocurrencies.
  • A family investment company can also be used to combine the management of multiple trust accounts into a single entity. Creating multiple trusts are often needed for estate planning reasons.  An LLC can allow the investments of those trusts to be managed as a single portfolio.
  • Trusts that are created for the benefit of a spouse or children often need to be irrevocable to fulfill their intended purposes. By comparison, an LLC’s operating agreement can be revised with the consent of the members.

Given the foregoing, it’s a bit surprising that more investors do not establish family investment LLCs.  If you would like to discuss whether an investment LLC makes sense for your family, shoot me an email HERE, I would be happy to talk to you.

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Thank you for reading,

Andrew J. Willms, JD., LL.M., CWM.

CEO and President, The Milwaukee Company, LLC


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