Starting a Business Family Investing w/ LLC

I've been researching the idea of starting an LLC to pool together assets (currently just securities, but hopefully rental property in the future) between my siblings and I, but have run into a few legal questions:

1) Can the initial capital contributions into the LLC's brokerage account be uneven, but have the operating agreement stipulate that each sibling has an equal share. (e.g. There are four total members. Three of the siblings contribute at the beginning (say 10k, 20k, and 40k in securities, respectively), and one does not, but the return on investment is split equally (each sibling gets 25%))?

2) I've read conflicting articles discussing "self-employment" taxes on LLCs. If this particular LLC is very low maintenance (say the securities are all sold and then everything is invested in ETFs at the beginning and just left to hopefully grow) and all members are either employed outside of the LLC or a student, would these taxes apply? None of us would take a salary and no "employees" would be managing the LLC.

3) Would it be best for the siblings with securities to sell them and just transfer the cash into the LLC or transfer them directly into the LLC and then decide as a group to sell and reinvest in different options (other securities, ETFs, real estate)?

4) Does it matter if the siblings are in different states? Most are residents of Oklahoma, but I work and live in Missouri?

5) Any general thoughts or opinions on this are also appreciated. Just want to do my research first.

C_Kin9 said:

I've been researching the idea of starting an LLC ...between my siblings and I,

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That's a horrible idea. Google "doing business with relatives" and you'll see a ton of horror stories about people getting screwed by relatives (including siblings) or the breakdown of relationships when disagreements happen.

doing business with relatives at DuckDuckGo

If you aren't capable of making these investments on your own, then just put your money into CDs and forget this idea.

C_Kin9 said:

Can the initial capital contributions into the LLC's brokerage account be uneven, but have the operating agreement stipulate that each sibling has an equal share.

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Yes.

C_Kin9 said:

would these taxes apply?

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Doesn't sound like it.

C_Kin9 said:

Would it be best for the siblings with securities to sell them and just transfer the cash into the LLC or transfer them directly into the LLC and then decide as a group to sell and reinvest in different options (other securities, ETFs, real estate)?

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We have no way of knowing what's "best" for people we don't know.

C_Kin9 said:

Does it matter if the siblings are in different states?

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It might or it might not.

adjusterjack said:

That's a horrible idea. Google "doing business with relatives" and you'll see a ton of horror stories about people getting screwed by relatives (including siblings) or the breakdown of relationships when disagreements happen.

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True, but you might also find some success stories, and it's worth noting that folks are FAR more inclined to write about the horror stories than the success stories.

C_Kin9 said:

I've been researching the idea of starting an LLC to pool together assets (currently just securities, but hopefully rental property in the future) between my siblings and I, but have run into a few legal questions:

1) Can the initial capital contributions into the LLC's brokerage account be uneven, but have the operating agreement stipulate that each sibling has an equal share. (e.g. There are four total members. Three of the siblings contribute at the beginning (say 10k, 20k, and 40k in securities, respectively), and one does not, but the return on investment is split equally (each sibling gets 25%))?

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There is no legal prohibition against doing that. However, doing that will result in tax issues. In particular, this arrangement will have the effect of making gifts from the relatives contributing more to the relatives contributing less, which may trigger gift tax issues.

C_Kin9 said:

2) I've read conflicting articles discussing "self-employment" taxes on LLCs. If this particular LLC is very low maintenance (say the securities are all sold and then everything is invested in ETFs at the beginning and just left to hopefully grow) and all members are either employed outside of the LLC or a student, would these taxes apply? None of us would take a salary and no "employees" would be managing the LLC.

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Whether self-employment tax applies to any member of the LLC depends on the the details of the activity of the LLC and how each member participates in the LLC. If the LLC is doing a lot of active trading it is more likely to be considered a trade or business than if it simply holds property/securities passively for long periods of time, for example. Without knowing the details of what you are going to do I cannot say whether self-employment tax (which is Social Security/Medicare tax for self-employed persons) would apply to any of the members.

C_Kin9 said:

3) Would it be best for the siblings with securities to sell them and just transfer the cash into the LLC or transfer them directly into the LLC and then decide as a group to sell and reinvest in different options (other securities, ETFs, real estate)?

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That depends on the details of the securities held and the arrangement the siblings want to have. It is not automatically better to do it one way over the other.

C_Kin9 said:

4) Does it matter if the siblings are in different states? Most are residents of Oklahoma, but I work and live in Missouri?

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They'll have to take into account that each of them are subject to different state taxes, but apart from that it does not matter.

adjusterjack said:

That's a horrible idea. Google "doing business with relatives" and you'll see a ton of horror stories about people getting screwed by relatives (including siblings) or the breakdown of relationships when disagreements happen.

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For some families it is a horrible idea. For a lot of families, though, investment partnerships work quite well, so long as they are clear from the outset how everything is going to work. I've had clients do it quite successfully. It just depends on the family. Sure, what you see online is all the bad — you should know by now that complainers, those with an axe to grind, or that want to push an agenda are the ones far more motivated to post online than those who are satisfied with how things are going.

Tax Counsel, I appreciate the responses/information! Just some follow-up clarifications.

Tax Counsel said:

There is no legal prohibition against doing that. However, doing that will result in tax issues. In particular, this arrangement will have the effect of making gifts from the relatives contributing more to the relatives contributing less, which may trigger gift tax issues.

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Here you are saying that initially if the percentage for the sibling that did not contribute anything is equivalent to over $15,000, then the other sibling(s) that "gifted" the amount would have to pay gift tax? Example, Sibling 1 contributes 20K, Sibling 2 = 10K, Sibling 3 = 10K, Sibling 4 = 0, but they each have 25% equity...there would be no tax consequences because the 10K from sibling 1 to sibling 4 is under the gift tax annual exclusion?

Tax Counsel said:

Whether self-employment tax applies to any member of the LLC depends on the the details of the activity of the LLC and how each member participates in the LLC. If the LLC is doing a lot of active trading it is more likely to be considered a trade or business than if it simply holds property/securities passively for long periods of time, for example. Without knowing the details of what you are going to do I cannot say whether self-employment tax (which is Social Security/Medicare tax for self-employed persons) would apply to any of the members.

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Here, if the money is just invested together for the long-term and not touched except to add to the amount a few times a year or to rebalance investments then the members avoid self-employment tax?

C_Kin9 said:

THere you are saying that initially if the percentage for the sibling that did not contribute anything is equivalent to over $15,000, then the other sibling(s) that "gifted" the amount would have to pay gift tax? Example, Sibling 1 contributes 20K, Sibling 2 = 10K, Sibling 3 = 10K, Sibling 4 = 0, but they each have 25% equity...there would be no tax consequences because the 10K from sibling 1 to sibling 4 is under the gift tax annual exclusion?

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In that example, Sibling 1 (S1) is contributing 50% of the total money contributed, S2 & S3 are each contributing 25%, and S4 is contributing nothing. Each of them is getting a 25% interest in the partnership. Thus, S2 & S3 are getting back the same amount they contributed. No gift tax issues for them. But S1 is getting back less than he/she contributed and S4 is getting more. There is a gift here from S1 to S4 of $10,000. If S1 makes other gifts to S4 during the year such that the total gifts he/she makes to S4 exceeds $15,000 then S1 will need to file a gift tax return.