NOTE: This blog includes discussions and explorations of legal issues. The content is intended for educational purposes only, and is not intended to be legal advice. You should always consult with a licensed attorney before taking any action that could affect or impair your legal rights.
UPDATE: A diagram that was originally intended for a longer version of this post, displaying the various management models of an LLC can be found here.
“Can I make my minor child a member of my LLC?” That question has been raised enough times that I thought it would be worth addressing here, in very oversimplified terms. The short answer to a literal interpretation of that “can” question is, “maybe,” but the answer to a question likely to be more helpful — “should I make my minor child a member of my limited liability company” — is, “probably not.”
In order for a limited liability company (“LLC”) to succeed, it needs someone (or some people) handling the day‑to‑day operations. While these individuals might go by titles other than “manager,” they are generally the person or people that the employees are going to think of as the boss (or bosses). Depending on the articles of organization of the LLC (akin to the articles of incorporation for a corporation) or the operating agreement for the LLC, management powers will either remain with all the persons with a member interest (i.e., the members), in what is referred to as “member‑managed,” or these powers will be delegated to a manager or managers, in what is known as being “manager‑managed” (while it is possible for a member to serve as a manager, for the sake of simplicity, assume that the manager is a compensated individual without a member interest). Under the manager‑managed model, the members of the LLC will typically have less of a hands‑on role in day‑to‑day operations, and in this sense, are more like shareholders of a corporation. If, however, the LLC remains member‑managed (which is the default under Georgia law), every member of an LLC is “an agent of the limited liability company for the purpose of its business and affairs,” and is capable of unilaterally entangling the LLC in contracts that while foolish, can still be enforceable. Ga. Code Ann. § 14-11-301(a) (Current through the 2020 Regular Session of the General Assembly).
Arriving back at the question of whether a minor child should be made a member of a parent’s or guardian’s LLC, one of the most obvious questions to consider — especially for a member‑managed LLC — is whether the child has sufficiently good judgment to effectively be allowed to play puppet-master with the LLC. Why? Because there really isn’t a great and simple way to make a minor child (or anyone else for most intents and purposes) only “sort of” a member of the LLC. The person is either a member or they are not; trying to have it both ways raises the chances of litigation that can suck all of the value out of the business. Add in the complexity of possible governance and contractual issues involved with having a member under the age of 18, and the potential for headaches grows exponentially.
But if the intent is to genuinely provide a child with a member interest in the LLC, with all the associated perks and responsibilities, then the measure of the child’s judgment should not be limited to his or her present state of mind. Setting aside all governance, contractual, and other issues that could arise when making a minor child a member of a parent or guardian’s LLC, the adult should possess a very high degree of certainty that the child will continue to possess good judgment from this day forward. Of course, possessing “good judgment” can certainly help to avoid business disputes with the child (or the child with other members), but it is not a guarantee, and it does little to prevent the business from potentially being wrapped up in familial disputes. And remember, many children end up going through a pre-teen and teenager phase — notorious periods of poor judgment in human beings. Maintaining a business relationship where one party might have the power (and responsibility) to enact consequences against the other party for misbehavior (and where there is the potential for a subsequent, rebellious response to those consequences) can make for an awkward power‑sharing dynamic, to say the least. Or imagine something even worse — finding yourself in a position where your teenager might literally have legal “dissenter’s rights.”
While it is understandable that a parent or guardian might want to establish a business that they can pass down to their presently‑minor children, or to teach the child the value of hard work, most business owners can probably apply a more targeted mechanism for achieving these goals. That’s where Berger Law can help. Berger Law is passionate about providing clients with the legal support they need to establish business relationships and pursue their endeavors. We are proud to do that by applying our appreciation for nuance to help our clients implement creative solutions.
|↑1||Ga. Code Ann. § 14-11-301(a) (Current through the 2020 Regular Session of the General Assembly).|