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 (LLC) 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 come mostly from the power of an LLC operating agreement. The family LLC can invest in everything from stocks, bonds, and real estate to mutual funds and start-up businesses.
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. It 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 only to build car washes in certain states.
Structure and Control of Family LLC
A family may form an LLC and elect 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.
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.
You may also want to also give consideration to forming a Delaware LLC or a Nevada LLC. These states may offer some advantages to some family groups. However, they may not be best suited for all groups.
Walton Enterprises as an Example
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. It has been reported that the family LLC won’t make decisions unless everyone is in agreement, explaining how Wal-Mart has experienced almost half a century of consistent control, culture, and growth.
Growing Your Family Investment LLC
Although you and your family may not have $100+ billion to put into your limited liability company like the Waltons, it is important to remember that they started with almost nothing, too, and built it from scratch from a tiny store in Arkansas. Disciplined investing over time can lead to great results, especially when protected by a family culture that values building wealth together.
Another famous family LLC is Cascade Investment LLC, the private holding company of Bill Gates. Cascade, which was funded by the systematic sale of Microsoft shares over many decades, now owns everything from luxury hotels to car dealerships and railroad stakes to restaurants.