How Families Can Invest Together With an LLC
Pooling Money and Investments to Build Family Wealth
One of the best uses of a limited liability company is as a vehicle for families to pool their money together to invest alongside one another. The benefits of a family pooling their money through a limited liability company to invest in everything from stocks, bonds, and real estate to mutual funds and start-up businesses come mostly from the power of an LLC operating agreement.
An LLC operating agreement can be written with all kinds of provisions. For example, the operating agreement could forbid individual family members from selling their shares of the limited liability company without the permission of all other members. This not only forces them to remain invested in the LLC, but allows everyone else to not worry about suddenly finding out there is a shareholder they don’t like that now has a say in their business. The operating agreement could also require individual family members to make regular contributions of cash or other assets, such as having each grandchild contribute $50 per month into the LLC.
Another provision of an LLC operating agreement could limit investments to certain types of assets, such as stocks with dividend yields over 5% or rental properties in a certain zip code. You could even require the LLC to only build car washes in certain states.
Samples of Family LLC Structures for Pooled Investments
Here are just a handful of the many potential arrangements a family could have when structuring an LLC to serve as a pooled investment vehicle.
One of the most famous family limited liability companies is Walton Enterprises LLC, which is the vehicle through which the members of Sam Walton’s family own their shares of Wal-Mart Stores, Inc. In effect, Wal-Mart is controlled by Walton Enterprises LLC, which is controlled by the Walton family. Each Christmas, the family meets at Helen Walton’s home and the managers of Wal-Mart make presentations to the LLC members. The members decide whether to pay dividends, reinvest in other operations such as the Arvest Bank, or a whole host of other options. Different types include:
Parent or Grandparent Controlled LLCs
In this case, a family forms an LLC and elects the parents or grandparents as the managers, giving them all authority over day-to-day decisions. The other family members (children, cousins, siblings, grandchildren) own membership interests in the LLC. These can be from their own savings where they buy their own investment in the firm or given as gifts from the older family members who want to pass money on to the next generation.
Member Controlled LLC
If your goal is to have the family work as an integrated unit, you can have your LLC operating agreement written so that all investment decisions must be approved by every single shareholder or a certain percentage of the shareholders. That way, you can create a culture of collaboration.