INSIGHT

Can a family office be an LLC?

Kris Marney • April 7, 2025

You can structure your family office in many ways. The trick is to structure it in a way that makes the most sense for your family unit, assets, and legacy goals—something a lot easier said than done.

As families seek optimal structures for their financial command centers, the Limited Liability Company (LLC) has emerged as a smart choice. LLCs offer a blend of flexibility, protection, and tax advantages that resonate with the unique needs of affluent families.

This structure allows for customized management and profit distribution, making it particularly appealing for families with diverse income streams or those juggling operational needs and investment income.

Today, we’ll explore the intricacies of using LLCs to structure your family office.

What is an LLC, and why is it an ideal family office structure?

An LLC is a unique business entity that merges the advantages of both corporations and partnerships, offering a blend of liability protection and operational flexibility. At its core, an LLC provides liability protection for its members.

If the LLC faces financial difficulties or legal challenges, only the assets owned by the LLC are at risk, safeguarding personal wealth.

Another significant feature of an LLC is its flexibility in taxation. Unlike traditional corporations that often face double taxation on profits, LLCs typically benefit from pass-through taxation. This allows profits and losses to be reported directly on the members’ personal tax returns, simplifying tax obligations and potentially lowering overall tax burdens. Members can also choose to be taxed as a corporation if that proves more beneficial for their financial situation.

LLCs also offer customization in management. Members can decide whether to manage the business themselves or appoint managers to handle operations. This flexibility allows families to tailor governance structures according to their preferences and needs, which can be particularly beneficial in multi-generational settings.

LLC benefits to family offices

The advantages of using an LLC as a family office structure extend beyond these core features. For one, LLCs provide asset protection, ensuring family wealth is shielded from creditors. This is especially important for families with significant business interests or investments, as it helps maintain control over their assets while minimizing exposure to risk.

Additionally, LLCs facilitate simplified governance for families navigating complex dynamics across generations. By establishing clear operating agreements, families can outline decision-making processes and ownership rights, reducing potential conflicts and ensuring smooth operations over time.

Finally, the ability to manage diverse income streams makes LLCs particularly appealing for family offices. Whether overseeing operational businesses, real estate investments, or financial portfolios, an LLC structure allows families to integrate various income sources into a cohesive management strategy. This adaptability supports long-term wealth preservation and growth.

Why LLCs for family offices are so tax efficient

Family offices structured as LLCs can leverage several tax advantages, making them an attractive option for managing and preserving wealth across generations. Let’s explore two key aspects of tax efficiency that LLCs offer to family offices: pass-through taxation and deductible business expenses.

Pass-through taxation

One of the most significant tax benefits of using an LLC structure for a family office is pass-through taxation. This feature allows the LLC to avoid double taxation, a common issue faced by traditional corporations.

Here’s how it works:

The LLC itself doesn’t pay federal income tax on its earnings.
Instead, profits and losses “pass through” the business to the individual members similar to partnerships.
Members report their share of the LLC’s income on their personal tax returns.
The income is then taxed at the individual income tax rates.

This approach can be particularly advantageous for family offices managing diverse investment portfolios. Capital gains, dividends, and other investment income retain their character as they flow through to the members’ tax returns. This means family members can benefit directly from preferential tax rates on long-term capital gains and qualified dividends.

Several deductible business expenses

Another key tax efficiency aspect for family offices using an LLC structure is the ability to deduct various business expenses. Section 162 of the U.S. Tax Code provides the framework for these deductions.

Family offices can deduct ordinary and necessary expenses incurred in carrying on their trade or business. This may include:

Salaries for family office staff
Office rent and utilities
Investment management fees
Professional services fees (legal, accounting, etc.)

With an LLC structure, family offices may also be eligible for “trade or business” qualification deductions. To claim them, the family office must qualify as a trade or business under IRS rules. This requires:

Regularity and continuity of operations
A primary purpose of income or profit
Separation between family office ownership and family assets

It’s crucial for family offices to maintain clear documentation and demonstrate that their activities go beyond mere personal investment management. The landmark Lender Management LLC case provides guidance on structuring family offices to meet these requirements.

By leveraging these tax efficiency strategies, family offices using LLC structures can potentially reduce their overall tax burden while maintaining the flexibility to manage diverse assets and investments.

Tax strategies (and considerations) for family offices using LLC legal structures

By leveraging the unique features of LLCs, family offices can optimize their tax positions while ensuring flexibility in governance and investment decisions. Here’s a closer look at several key strategies particularly applicable to LLCs.

Leverage multiple classes of interests

One of the standout features of LLCs is their ability to create multiple classes of interests. This flexibility can be particularly advantageous for family offices, allowing them to tailor ownership structures to meet their unique needs.

For example:

Carried interest for junior family members: LLCs can issue carried interests to junior family members, enabling them to participate in the profits without having to invest significant capital upfront. This incentivizes younger generations to engage actively in managing family wealth.
Preferred interests with frozen values for senior family members: Senior family members can hold preferred interests with a predetermined value. This arrangement protects their investments while allowing junior members to benefit from growth in the LLC’s assets.

Different classes can also have distinct distribution rights and voting powers, allowing families to maintain control while providing flexibility in profit sharing. This structure enhances family members’ engagement and helps manage expectations regarding wealth distribution and governance.

Take advantage of preferential capital gains tax treatment

LLCs also enable family offices to benefit from preferential capital gains treatment. With pass-through taxation, investment gains retain their character as they flow through to individual members’ tax returns. This means members can directly benefit from long-term capital gains rates on qualifying investments, which are generally lower than ordinary income tax rates.

In contrast, C corporations face double taxation where all distributable income is taxed as ordinary income. By operating as an LLC, family offices can avoid this pitfall and optimize their tax liabilities.

This preferential treatment is particularly beneficial for families focused on long-term investment strategies, as it allows them to maximize after-tax returns on their investments.

Consider multiple entity structures

LLCs allow family offices to establish a multiple entity structure, creating separate entities for different asset classes. For instance:

An “Alternative Investments Pool LLC” could manage private equity or hedge fund investments.
A “Large Cap Equities Pool LLC” might focus on publicly traded stocks.
A “Real Estate Investments LLC” could handle real estate holdings.

This structure enables family members to choose which investments they wish to participate in while centralizing management functions within the family office. It provides diversification opportunities while maintaining streamlined oversight.

Look into Series LLCs

Series LLCs allow for the creation of multiple “series” or sub-units within a single LLC structure, each with its own assets, liabilities, and members. This structure can provide tax advantages by potentially allowing each series to be treated as a separate entity for federal tax purposes.

This flexibility enables different tax elections and accounting methods among the series, which could be beneficial for tax planning strategies. For instance, it may allow for isolating certain activities to avoid specific tax rules or maximize deductions.

However, it’s important to note that state tax treatment can vary, with some states treating the entire Series LLC as a single entity and others recognizing each series separately.

Avoid “phantom income”

Unlike S corporations, which are required to distribute profits equally among shareholders, LLCs have more flexibility in profit distribution. This characteristic allows them to avoid situations where members owe taxes on income they haven’t received—often referred to as “phantom income.”

By structuring distributions based on actual cash flow rather than equal shares, family offices can better align tax obligations with actual income received by members. This approach helps reduce tax burdens and enhances financial planning effectiveness.

By focusing on these LLC-specific strategies, family offices can significantly optimize their tax efficiency while maintaining flexibility in management and investment decisions. It’s important for families to consult with tax professionals who understand both current laws and the specific circumstances of their family office to maximize these benefits effectively.

Why an LLC can be beneficial for family office estate planning

Estate planning strategies like valuation discounts and annual gifting are particularly well-suited to LLCs, making them an attractive option for family offices.

Valuation discounts

LLCs enable families to take advantage of two key valuation discounts:

Lack of control discount: Also known as a minority interest discount, this applies to LLC interests that don’t provide meaningful control over business operations. It typically ranges from 10% to 30% of the interest’s value.
Lack of marketability discount: This reflects the reduced liquidity of LLC interests, which are not easily sold or transferred outside the family. Discounts can range from 15% to 50%.

These discounts can significantly reduce the taxable value of LLC interests for gift and estate tax purposes, potentially leading to substantial tax savings.

Annual gifting strategies

LLCs provide a convenient structure for implementing annual gifting strategies. For example, LLC interests can be easily divided into units or percentages, facilitating gradual transfers to family members.

Additionally, families can gift LLC interests up to the annual gift tax exclusion amount ($18,000 per beneficiary in 2026) without incurring gift taxes.

Combined with valuation discounts, this allows for transferring a greater economic value within the annual exclusion limits. By leveraging these strategies, family offices using LLC structures can potentially transfer significant wealth to the next generation while minimizing gift and estate taxes.

Top regulatory considerations for LLC-based family offices

Family offices structured as LLCs must navigate a complex regulatory landscape. Understanding and complying with these regulations is crucial for maintaining legal standing and optimizing tax benefits.

Understand the Corporate Transparency Act (CTA)

The Corporate Transparency Act (CTA), effective January 1, 2024, requires beneficial owners of U.S. companies to disclose certain information to the Financial Crimes Enforcement Network (FinCEN). Entities created before 2024 must file their initial report by January 1, 2025, while those created in 2024 must report within 90 days of formation.

To ensure compliance, family offices should review their organizational structure, gather required information from beneficial owners, and develop a system for timely and accurate reporting. Failure to comply can result in significant fines and penalties.

Get a trade or business classification

Structuring the family office as a legitimate trade or business under IRS guidelines is crucial for expense deductibility. The Lender Management LLC case (T.C. Memo. 2017-246) established that family offices can qualify as a trade or business if they engage in activities “far beyond those of an investor.”

To qualify, family offices should provide services beyond basic investment management, demonstrate regularity and continuity in operations, and maintain clear separation between family office ownership and family assets. This classification allows for the deduction of expenses under Section 162 of the Internal Revenue Code.

Comply with SEC registration requirements

Family offices may need to register as a Registered Investment Advisor (RIA) depending on their activities and assets under management. Generally, advisers with at least $100 million in assets under management must register with the SEC, while those with less typically register with state authorities.

However, the SEC has defined exemptions for certain family offices. A family office is exempt from registration if it provides investment advice only to “family clients,” is wholly owned by family clients and exclusively controlled by family members or entities, and does not hold itself out to the public as an investment adviser.

By understanding and adhering to these regulatory considerations, LLC-based family offices can operate effectively while minimizing legal and financial risks. It’s crucial to consult with legal and tax professionals to ensure full compliance with these complex regulations.

Challenges of using an LLC for your family office structure

While LLCs offer numerous benefits for family offices, they also present challenges that require careful consideration.

Family conflicts may emerge over management decisions or profit distribution, potentially straining relationships and complicating operations. The initial setup process can also be costly, involving legal fees, state filing fees, and expenses related to transferring assets into the entity.

One significant drawback is the limited liquidity of LLC interests, which are typically restricted to family members. This can make it difficult for individuals to sell their stake if needed.

Ongoing compliance requirements, such as annual filings and meticulous record-keeping, can be time-consuming and expensive. The Hellmann case highlighted additional complexities, including potential SEC registration requirements and the need to balance tax benefits with practical operational considerations.

Families must carefully evaluate these factors, weighing the drawbacks against the advantages when considering an LLC structure. Open discussions about potential challenges and establishing clear governance structures are crucial for mitigating risks and ensuring long-term success.

Should your family office be an LLC? Let’s find out together

LLCs have emerged as a powerful tool for structuring family offices, offering a unique blend of tax efficiency, flexibility, and asset protection. Their pass-through taxation structure allows for potential deductions of investment expenses and salaries, which would otherwise not be deductible for individual partners in a partnership structure.

However, the effectiveness of an LLC structure depends on careful planning and meticulous compliance with regulations. As you consider your family’s strategy, explore whether an LLC structure aligns with your long-term goals. This decision should factor in your family’s unique dynamics, investment objectives, and legacy planning aspirations.

“BPM has helped many families decide on the right structure when forming a family office. We then take it a step further by providing a suite of services from tax planning to staffing to outsourced accounting providing further oversight. “ – Kris Marney, Director – Advisory

By thoughtfully structuring your family office, you can create a robust foundation for preserving and growing your family’s wealth for generations to come. Schedule a call with the BPM Family Office Team to create a family office structure that works for your family.