When you are forming a Limited Liability Company (LLC) for your business, one of the first questions you may ask yourself is whether you will form the LLC by yourself or with a spouse or maybe a business partner.
In our conversations with potential clients, we often hear people say they want to “LLC myself”. This is a common misconception as you are not “LLC’ing” yourself.
Setting up an LLC creates a legal entity to hold your business assets in order to protect your personal assets from lawsuits filed against your business.
(If you are forming an LLC just to protect your real estate assets, or are a real estate investor, then please see our post on “When to form an LLC for real estate” for more details on that special situation.)
Trust Is #1 Priority
The paperwork you submit to the state will ask you to identify who will be the members of your LLC.
The members of your LLC can be family, friends, partners in your business, or really anyone you want to be a part of your legally formed entity.
It makes sense that you would have your business partner – or the person who helps you build and promote the business – as a member of the LLC.
On occasion, this is a spouse or relative.
Many startup businesses were founded by a married couple who both had equal talents and skills to bring to the table, and who no longer wanted to be slaves to the daily corporate grind.
If this is the case for you, and you are unsure whether your LLC should include both you and your spouse as members, then let’s discuss the upside AND the downside of forming your LLC with both of you as members.
Your Articles of Organization, as it is called in many states, is the document that you submit to the state to form your LLC.
While the state does not care who you list as members of your LLC, your members should be people you trust implicitly as they will be part of your business, your culture, your finances, and your reputation.
Just because you trust someone does NOT mean they should automatically have a stake in the business.
Re-read that last sentence because it is true. No matter what your spouse or brother-in-law or 3rd cousin removed says.
The state also does not care whether you set your LLC up as a single-member LLC (1 person LLC) or a multi-member LLC (2 or more people).
The structure of your LLC is totally up to you.
So, what would be the advantages to including your spouse as a member?
– Shared responsibility for the successes/failures of the business
– Co-managing a business with someone you already like and respect
– Ease of communicating when business items need attention
– If your business is profitable, you know it can be a legacy for your spouse
Sounds like a good proposition, right?
Maybe we better consider the other side of this coin…the advantages of excluding your spouse from being a member of your LLC.
– Ability to make decisions quickly and without consultation
– Improved time efficiency – there is no question about roles of the relationships (work vs. personal)
– No hurt feelings from “bringing work home” when both are heavily involved in the business
– PLUS, if they are not a member, you could put your larger personal assets in their name, thereby providing an additional layer of protection
After carefully considering what works best for YOUR situation – there is no right answer really – but, we recommend putting an Operating Agreement in place to set forth the “rules” of the game.
This is a good idea whether your spouse is involved in the LLC or not.
An Operating Agreement does the following for your LLC:
1. It lays out how the LLC will be managed.
2. It defines how much of the LLC each member will own.
3. It clearly spells out how the profits/losses will be distributed by the members.
We provide a 6-page Operating Agreement in the LLC Formation Course for you to use and adapt as needed.
An Operating Agreement can be longer if you like, but the best ones are the ones that are clear in what the rules are, and how they will be executed.
Remember, simplicity is best.
The other bonus of a good Operating Agreement is that if you ever end up in court for any reason, it helps show the court the legitimacy of your business and lends credibility to you as a business person.
One Last Thing…
If you do include your spouse as a member of your LLC,
And, everything goes south quickly,
And you both agree that you need your space,
Then, you can amend your Articles of Organization (for a small fee).
You can replace your spouse with someone else, or even just be a single-member LLC! Heck, you were doing all the work anyway! Am I right?
Amending your Articles of Organization is a quick and painless process and can be done fairly quickly. Just remember to also amend your Operating Agreement to match. (No fees for amending that document, and you can do it at home on your computer. Really. Just save it as a new version!)