Building a Business

How to Incorporate Your Family and Why It’s about More Than Money

Updated on July 29, 2020 Updated on July 29, 2020
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Table of Contents  
  1. Why You Should Incorporate Your Family
  2. How to Incorporate Your Family
  3. Is Incorporating Your Family Right for You?

Business owners get a lot of perks regular people don’t. But here’s the secret: Business owners are ordinary people, and starting a small business isn’t that hard. Maybe you don’t think you’re the type of person who should run a small business. Do you have a family? Then you should incorporate your family into a small business.

I’ll walk you through how to incorporate your family, the world of tax optimization it opens up for you, and the invaluable lessons having a small business will teach your children.

Did you know 34 companies in the S&P 500 paid $0 in income tax in 2019? How much did you pay?

I think it’s safe to say it was probably more than zero dollars. Want to know the difference? They’re a business, and you’re not.

The question isn’t “Why do they get those tax breaks?” but rather, “Why haven’t you made your family into a small business?”

Keeping more of your hard-earned money isn’t the only reason you should incorporate your family. I’d say it’s secondary.

The main reason you should incorporate your family is for the invaluable lessons it will teach your children.

Incorporating your family into a small business will teach your kids about money, responsibility, and save you money on taxes.

Why You Should Incorporate Your Family

One of the biggest frustrations we hear from our readers is the lack of financial knowledge given as kids. A lot of us grew up in households where you didn’t discuss money.

It’s easier to ignore the elephant in the room, but it’s a disservice to our children not to teach them about the concepts that govern our modern civilization.

Imagine being taught at a young age, the benefits of saving, investing, and tax-optimization instead of struggling with these concepts as adults.

Many things in life would’ve come easier if we didn’t spend years banging our heads against the wall, not understanding how finances work.

Understanding how it all works on a day to day level sets you up for a lifetime of money working for you, not against you.

I learn best by doing. Telling me how something works over and over isn’t as impactful as executing one concrete example. The real-life lessons stick.

It does more for me than countless hypotheticals.

Starting a small business gives your children tangible examples of how they’ll put these financial concepts into practice.

Financial literacy is like language learning; once you understand it, the jumbled letters and figures become easily readable charts to success.

A Real-World How to Incorporate Your Family Example

My neighbors raise miniature cows. They started this small business because they wanted to teach their children the value of hard work and responsibility.

They knew nothing of cows going into it, but that was part of the process.

how to incorporate family

Their kids can see real-world examples of assets, liabilities, and debt daily. They’re living out tough life lessons, including how even if it’s 12 degrees outside and snowing, the cows still need to be fed.

You can’t just show up to work when it’s sunny, and you feel like it. In life, you have to be consistent and work hard even when it’s cold out.

They’re able to watch their hard work pay off when they sell their cows.

These are all great life-lessons to teach your children to develop their grit and work-ethic, but how does it help you? For my neighbors, anything business-related counts as a write-off.

They use their truck for hauling feed and supplies for their cows, so they’re able to write it off. The land can be taxed as agricultural instead of residential, so they save money there too.

If they go out to dinner and talk about their business, they’re able to write off the restaurant expense.

When you have a small business, there’s potential everywhere you look to reduce taxes.

The kids can earn a wage for the work they do. Since the children don’t make an extravagant amount of money, they’re in a low tax bracket.

They put the money earned from the business into their after-tax Roth IRAs. It will grow tax-free.

Is Incorporating Your Family Illegal?

None of this is illegal. The U.S government set up the tax code precisely to benefit people who are adding value in the form of a small business.

The miniature cows they raise are turned into food to feed many families. The fact my neighbors can get these benefits matters little to the government.

Not all of us have the resources to start raising miniature cows, but we can all do something. When you dig into it, you’ll find the benefits often vastly outweigh the initial costs.

It’s important to talk with your accountant to make sure the things you want to write-off are within the boundaries of the IRS tax code.

Remember, we’re not trying to skirt the rules, we’re trying to play within them and win. That’s what those 34 companies in the S&P 500 who paid zero dollars in income tax are doing. It’s what we want to do too.

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How Will You Incorporate Your Family?

The potential small businesses at your fingertips are endless. For example, your kid mows the lawn.

Most people give their kid a few bucks and make a joke about them owing rent. But you can start a lawn care service.

Use this opportunity to teach your children about entrepreneurship and the benefits of working for yourself.

You can pay them for their labor through the lawn care small business you set up. They’ll pay taxes on that money (in the 0% tax bracket) and then save the money in an after-tax Roth IRA account.

They can learn how to file taxes, the benefits of saving money, how compound interest works, and the importance of being reliable.

As an added benefit, anything relating to your lawn care business is now a write-off. Your yard can be the company’s showcase, so keeping it in tip-top shape is a business expense.

The mowers, weed-eaters, and mulch are all part of the business. If you need a work vehicle to drive the equipment to your new client’s homes, that’s a business expense too.

When you have a small business, you can pay your children to do these tasks while teaching them valuable lessons along the way.

You can’t pay your children through your business to do unrelated chores, but if you have a small business, work-related tasks done for the business qualify.

Is there something your family could do together that would earn a little bit of money while teaching your children responsibility?

If so, set up a Limited liability company (LLC) or S-Corp and get this tax saving, knowledge-growing train rolling.

How to Incorporate Your Family

You’ll need to decide what kind of business structure you want to form. If you’re looking to get legal protection for your child’s lawn mowing business, a sole proprietorship might be the best option.

If you’re looking at starting a small business where your family raises miniature cows to teach your kids about hard work and responsibility, then an LLC, S-Corporation, or C-Corporation might be the better option.

Corporations are considered separate legal entities from their owners. Flow-through entities, such as LLCs, sole proprietorships, and S-Corporations, avoid double taxation by passing earnings onto their workers.

C-Corporations end up paying double tax unless they elect to pay dividends to their employees.

For most people, forming an LLC is the easiest and quickest way to start a small business. You can talk to your tax professional whether your LLC should elect to be taxed as an S-Corp.

When you incorporate your family into a small business, every situation becomes a teachable moment for your kids.

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I hope I’ve convinced you that it’s worth your time to incorporate your family into a business entity. What’s involved in the incorporation process?

Essential Steps to Incorporate Your Family

For a more in-depth breakdown, check out our article about how to form an LLC.

Step One: Select the state in which you want to do business. This step will almost always be done in the state you reside in, but a few places such as Nevada and Delaware have better laws for small businesses. In most cases, it’s not worth the hassle, so we recommend setting up the business where you live.

Step Two: Pick a business name. This one is easy. You’ll have to do a quick name search to make sure your desired business name is available. There are also a few stipulations on what you can and can’t name a business.

Step Three: File Articles of Organization or Incorporation. If you’re starting an LLC, you file Articles of Organization (some states call this a certificate of incorporation). For starting an S-Corporation or C-Corporation, file Articles of Incorporation. You can typically complete the articles of incorporation on your state’s secretary of state website.

Step Four: Appoint a Registered Agent. This is a person or company accepting official mail on your company’s behalf.

Step Five: Decide on the management structure. With this step, you’re deciding between having a member-managed small business or a manager-managed small business. Almost all family-run businesses will be member-managed as you’ll want control of the daily operations.

Step Six: Create an LLC operating agreement. This step is the legal document setting up the ownership structure and what the member’s responsibilities will be. For single-member LLCs, this step may be unnecessary.

Step Seven: Get your regulatory and tax requirements organized. You’ll receive your employer identification number (EIN), which you can get for free from the IRS website.

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Is Incorporating Your Family Right for You?

It may seem like a lot of steps to start a new business, but it’s not too complicated. A lot of the steps are overkill for a family business.

But, it doesn’t take long, and it protects your assets. Personal liability is a bummer when one of your children accidentally runs over a rock and shatters the neighbor’s window while they’re cutting grass.

There are filing fees associated with operating a small business as well as needing to send annual reports.

You’ll also want to open a business bank account to keep the money earned through the business separate from your personal accounts. If you plan on scaling your LLC, writing bylaws and figuring out a board of directors will be critical future steps.

In the United States, the tax code is filled with ways you can lower your income tax. The people who think outside the box are the people who get to keep more of their hard-earned money.

This is not legal advice. Talk to your tax professional to see what qualifies as a business expense for your situation. For specific legal questions, contact a business lawyer. For more general guidance, your state’s secretary of state office can help you.

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David Lautaret - Contributor David Lautaret is a thirty-something writer based in Portland, OR. His passion for financial independence stems from unrelenting, low-grade anxiety that he doesn't know enough which explains why he can't stop educating himself on the subject. He has a degree in Business but prefers to use cartoons and humor to make his points. He's a husband to a beautiful wife and a tremendous father to a super cute baby girl.
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