Can a Minor Own an LLC?

There are stories all over the internet about kids and teenagers who have started businesses and are operating successfully as entrepreneurs.

Sisters Caroline and Isabel Bercaw started making bath bombs in their basement in Minneapolis when they were 11 and 12 years old, eventually growing the highly successful business – Da Bomb – into a small empire.

R.J. Duarte started cutting grass in Golden, Colorado when he was 8 and built a flourishing, high-end landscaping service by the time he was 18. And then there’s Cory Nieves, who started baking cookies as a young child and turned his business into the beloved Mr. Cory’s Cookies enterprise.

If you’re a minor – an individual who is not yet legally recognized as an adult by your state – and you’re looking to start a business, I applaud you! The desire to start achieving your dreams at a young age is an admirable trait.  If you’re a parent or mentor of a young entrepreneur, you’re in a great position to provide encouragement and guidance.

It’s important at any age, of course, to think carefully about how you should proceed when planning a business, and to make sure you understand any laws and regulations that might affect you.

While a minor can own a LLC, there may be practical and legal challenges that could affect how the business must be set up and operated. Let’s break this down, starting with why an LLC is usually an advisable business structure for someone of any age.

Why an LLC?

An LLC is short for Limited Liability Company. It is a popular type of business entity for entrepreneurs of all ages for a variety of reasons.

Because the business is a separate legal entity from its owners, the assets of the business are separate from those of the LLC owners, who are called members. If the business is sued or can’t pay its debts, only the assets of the business normally are at stake – not the personal assets of members. That protection is one of the primary reasons LLCs are so popular.

While a minor is not likely to have very substantial financial assets, an LLC would protect the assets of any adult who’s involved with the business. If you’ve invested money in your son’s baking enterprise, for instance, your personal assets would be protected in the unfortunate event that a piece of broken glass accidentally got into a cupcake and a customer filed a lawsuit after being injured when biting into it.

In addition, LLCs have flexibility in how they’re taxed. The owner of an LLC can be taxed as a Sole Proprietor, with all profits, losses, and tax responsibilities passed through to their personal tax returns and taxed at the owner’s individual rate. Or they can elect to be taxed as Corporation, which in certain cases may be advantageous.

There are no limits on the number of members an LLC can have, making expansion easy as the business grows. And if you grow the business and eventually want to sell it – either to move on to another venture, pursue your education, or for another reason – having it structured as an LLC gives you the ability to do that. Some other types of business structures, such as a Sole Proprietorship, are not considered separate legal entities and, while the assets of the business can be sold, the business itself cannot.

An LLC is more likely than a Sole Proprietorship or Partnership to be able to attract investors or get loans, and having an LLC is likely to increase a young person’s credibility with potential customers and partners. Also, an LLC can apply for an Employer Identification Number (EIN), which is an ID number issued by the IRS. Having an EIN can make it easier to get business bank accounts established, a process that could be difficult for a minor-owned LLC. You can apply only for an EIN, which the IRS issues at no cost.

And because it’s not overly complicated to form an LLC and keep it in compliance with state laws, it’s likely that a minor could assume a hands-on role in the business.

LLC Restrictions for Minors

The first step of owning and running an LLC is to get it registered with the state in which it will operate. LLCs come under state jurisdiction and must follow the rules and regulations enforced by the Secretary of State or corresponding agency.

Most states don’t have rules prohibiting a minor from forming an LLC, but a few require that LLC organizers must be at least 18 years old. Those states are Colorado, Illinois, Minnesota, Oregon, and Texas.

Otherwise, states typically have little to say about how old a person must be to form an LLC or to be a member of one. Remember that LLC members are the owners of the business, regardless if there’s one member or hundreds. If a minor is a member of an LLC, they are also an owner.

Challenges of a Minor Owning an LLC

While it may be legal for a minor to form and serve as an owner of an LLC, there could be practical considerations that create some challenges. A particular problem pertains to special legal rules regarding minors and contracts.

The rules vary depending on your state, but most types of contracts that minors enter into are voidable. That means the minor has the option of honoring the contract or ending it. Typically, if the contract is voided, the minor will need to return anything of value obtained from the other party. The ability for a minor-owned LLC to void a contract may, understandably, make other companies reluctant to do business, including lenders who may refuse to draw up a loan agreement with a minor or banks reluctant to open business accounts. Also, many states prohibit minors from entering into certain types of contracts, such as buying real estate or land.

Credit card companies typically won’t issue cards for anyone under 18, so if there’s not an adult willing to add a minor as an authorized user on their card, it could be difficult for a minor-owned LLC to make business purchases. And banks are often unwilling to open business accounts for LLCs owned by minors.

Another challenge for minor-owned LLCs is simply a lack of experience as a result of age. Running a business entails making endless decisions that impact the health of the company. Calculating what’s best to do becomes easier as you face repeated issues and can base your actions on the results of past decisions. Mistakes are common among most new business owners but could be particularly consequential for young entrepreneurs with limited experience.

Overcoming These Challenges

Once you understand the challenges you could encounter as a minor who owns an LLC, you can explore some ways of getting around them.

By adding one or more members who are over age 18 to the LLC, you can bypass any contract issues, establish confidence with potential customers and vendors, get business credit cards, and establish business bank accounts. Bringing on a supportive adult, such as a parent, a sibling who is over 18, or a trusted friend, can be a great benefit to a minor-owned LLC.

That person could sign all contracts on behalf of the LLC. They also can file a Statement of Authority with the Secretary of State, stating that only LLC members who are over 18 will serve as the company’s agents with the legal authority to bind the business to contracts. And an adult LLC member is likely to be able to open business bank accounts and apply for business credit cards without encountering problems a minor may face.

While bringing on one or more adults as members of the LLC could be beneficial, another option would be to establish a manager-managed structure for the company. The default management structure for LLCs in most states is member-managed, a system where all or some members of the LLC manage the day-to-day business operations. But you can choose to have someone other than a member manage the those operations, a system that is known as manager-managed.

A manager-managed structure could be beneficial for a minor-owned LLC, as the manager would be an adult with the ability to open bank accounts, purchase inventory, and perform other tasks on behalf of the business.

The downside of a manager-managed system is that it could limit the minor’s participation in the business, even resulting in loss of control of the organization and defeating the purpose of starting the business in the first place.

A supportive parent or trusted friend or is likely to be able to provide the help a minor-owned LLC might need to get off the ground and running smoothly. An ambitious minor also could seek help from a community member who has an established business and is willing to serve as a mentor to a young entrepreneur.

Knowing When You Could Use Some Help

Regardless of what age someone is when opening a business, they should be sure they understand what is entailed with establishing an LLC and keeping it operating in compliance with state laws.

Requirements for getting an LLC up and running include choosing a name for the business, filing Articles of Organization with the state, making sure you have any business permits or licenses you might need, completing and filing annual reports, and other tasks. You’ll need to draw up an LLC Operating Agreement, which states the purpose of the business, who the members are, what percentage of the LLC each member owns based on how much money they contribute, how the LLC will be taxed, when members’ meetings will be held, and other information outlining how the company will operate.

As you can see, there’s a lot involved. You can find all kinds of resources to help you sift through the details of starting and running a company. If you’re feeling overwhelmed, however, it would be wise to seek help from a trusted, experienced professional.