Can You Start an LLC as a Minor?

The world has seen many instances of kids building successful businesses. These young entrepreneurs have operated food trucks, designed clothing lines, and developed toys, among other pursuits. Kids are more than capable of coming up with business-savvy ideas and operating the day-to-day demands.

But can someone under 18 form a limited liability company (LLC)? Can they even be an LLC owner?

Can Minors Form an LLC?

To form an LLC, one or more people (or a business entity such as a corporation or LLC) must act as the organizer. The organizer is responsible for setting up the LLC. The organizer's most important duty is to complete and sign the LLC's formation document. In most states, this document is called "articles of organization" or "certificate of organization."

The organizer will then submit this filing to the secretary of state's office or comparable state filing office with the required fee. Filing of the articles gives the LLC legal life. Typically, the organizer is also an owner of the LLC, but such membership isn't required.

Every state has its own LLC law, and these laws can vary. The LLC laws of some states specifically provide that minors under age 18 can't serve as organizers to form LLCs.

The LLC laws of most other states say nothing at all about how old a person must be to serve as an LLC organizer. So, kids and teenagers can feel free to organize LLCs in those states. However, it's always a good idea to first check with your state's secretary of state office before filing your formation documents. You can also consult a local business attorney.

If you live in a state that doesn't allow a minor to form an LLC, you can always form your LLC in a state that does allow it. You can then register your out-of-state LLC in the state where you live or wish to do business. Alternatively, you can have someone over the age of 18 serve as the organizer on your behalf.

Can Minors Own an LLC?

An LLC's members (owners) can be individuals or other business entities such as other LLCs or corporations. An LLC can have any number of members—anywhere from one to thousands. In general, no law or rule prevents a minor from being a member of an LLC.

However, practical problems can arise when an LLC has members who haven't yet reached age 18. Minors could have issues getting a business loan, purchasing real estate, or signing contracts. We'll discuss these issues more later.

Should You Form an LLC?

If you have a great idea for a business, but want to limit your legal liability as much as possible, you should create a separate legal entity to own and operate the business. The LLC has become one of the most popular ways to legally organize a business.

Advantages of an LLC

An LLC offers owners many benefits, with some particularly advantageous to minors.

Limited liability. An LLC provides the same limited liability as a corporation. An LLC's assets and liabilities are separate from the owners'. So, if you take on debt in the LLC's name, you're not personally responsible for that debt. In other words, a creditor usually can't come after your personal assets to pay the LLC's debt. Kids and their supervising adults can rest easy knowing that minors—and adult LLC owners for that matter—won't be personally on the hook for business liabilities. As young entrepreneurs get older and their bank accounts grow, they can keep their personal assets secure under this business structure.

Flexible management structure. An LLC can be managed by its members or by one or more designated managers. If you choose to have your LLC run by its members, then you'll want to agree on each member's duties. If you decide on a manager-managed LLC, then you'll need to appoint a manager to run the LLC. The manager can be a member or a nonmember. In this arrangement, the manager will take care of the daily operations, and the non-manager members will take a more passive role. If a minor wants to form an LLC, they can recruit an adult as a co-owner or manager. The minor can still take an active role in the business. But the young LLC owner can find it useful to have an adult to help them with the trickier sides of running a business.

Ease of formation and maintenance. Compared to a corporation, an LLC is relatively easy to form. In most states, you can legally create an LLC online, which should be relatively achievable by the increasingly tech-savvy younger generations. To form an LLC, you'll need to submit a formation document—typically called "articles of organization" or "certificate of organization"—to your state's business agency (in most cases, the secretary of state's office). You'll need to provide basic information about your LLC, including its business name, principal place of business, and the name and address of your company's registered agent. In most states, only people aged 18 or older can serve as a registered agent. So minors will need to appoint a person or company as their company's registered agent. In most cases, a minor can ask their parent or guardian to act as their LLC's agent.

Various tax options. An LLC is taxed as a partnership (if it has more than one member) or a disregarded entity (if it's a single-member LLC) by default. But you can elect to have your LLC taxed as a corporation or S corporation. As long as you qualify, you can make these elections at any point in your LLC's life. If the LLC is taxed as a partnership, disregarded entity, or S corporation, LLC owners will benefit from pass-through taxation. The LLC itself will not be taxed. Instead, owners will be taxed on their share of the business income. Not all minors will need to file a separate tax return. Whether a minor needs to file a return will depend on their earned income and the applicable standard deduction. If you have questions about when and how to file taxes as a minor, you should speak with a tax professional.

Disadvantages of an LLC

An LLC offers many advantages, but this business structure isn't free of drawbacks.

Formation and maintenance costs. You must file formation paperwork with your state to legally form your LLC. Along with your paperwork, you'll need to pay a filing fee for your LLC. This fee can range from $35 to $500. On average, you can expect to pay $100 to $200. In addition to formation costs, you'll also likely need to pay a filing fee to maintain your LLC every year or every other year. Most states require LLCs to file an annual (or biennial) report. Out of the states that require LLCs to file a report, only a handful waive the filing fee. These fees can be especially burdensome to minors who usually don't start with as much business capital.

Legal hurdles specific to minors. As discussed earlier, not every state allows minors to start LLCs. If you live in one of the states that doesn't allow minors to form an LLC, you'll need to either forego this entity option or get someone who's 18 or older to form one for you.

You could also face other business challenges as a minor. Some of these troubles aren't specific to your business structure. We'll discuss these potential problems and how to approach them below.

Challenges of Minors Owning LLCs

While you can own an LLC as a minor, you'll likely run into some administrative and legal hurdles in the course of your business.

Minors Can Void Contracts

Problems can arise when minors own LLCs because special legal rules govern the ability of minors to make and break contracts. As a general rule, with some exceptions, a minor lacks the capacity to contract. As a result, a minor can void any contract that they sign. They can choose to honor the contract or break it off.

If the contract is voided, the minor must ordinarily give back anything of value they received from the other party, such as money or property. In addition, many states don't allow minors to enter into some types of contracts at all on their own, such as contracts for the purchase or sale of real property.

Because a minor can pull out of their end of the contract without consequence, lenders and other companies might hesitate to do business with a minor-owned LLC. Specifically, they could fear that any agreements they enter into with the LLC won't be legally binding. For example, a supplier might be reluctant to extend credit to an LLC owned by a minor for fear that the minor could later void the contract.

Lenders Could Be Reluctant to Extend Credit

Young entrepreneurs are at a distinct disadvantage when it comes to raising money for their new business. When granting a business loan, lenders can—and often do—look at your business plan, financial statements, bank statements, and tax returns. If your business is new, lenders will assign even more risk to your loan.

To secure a loan, you'll likely need to provide meaningful collateral and a personal guarantee. A parent or other trusted adult can serve as a personal guarantee if they're willing. When someone acts as a personal guarantee for your business loan, they become personally responsible for that debt. If your business takes a downturn and you aren't able to pay back the loan, the lender can go after your guarantor to recuperate the debt.

Oftentimes, minors who are just starting their business don't have any collateral to offer. Collateral can be:

• cars and other vehicles
• equipment
• inventory
• accounts receivable (outstanding invoices)
• bank accounts
• real estate property, and
• valuable personal property like jewelry and art.

Anyone under 18 likely doesn't have an interest in real estate. In addition, the other types of collateral might be hard to come by, especially if the business is new or the business owner is particularly young.

Getting a business loan isn't impossible. But it'll cost you.

How to Overcome the Challenges of a Minor-Owned Business

Virtually everyone who starts a business faces challenges. But these challenges can be pronounced and numerous for young business owners. But if you have a willing adult, many of these issues can be overcome.

Kids and teens looking to start a company should consider including someone over the age of 18 in their business operations. For example, you can ask a parent, adult sibling, grandparent, or trusted friend. As long as they're at least 18 years old and willing to go into business with a minor despite the risks, you're ready to go.

You can ask the adult to join your enterprise in one of two capacities.

• An adult can be a fellow member (owner): If you're okay with sharing ownership of your company, you can simply ask an adult to be a second member of your LLC. Before you both agree to go into business together, you should work out the more important details of the arrangement, including your percentage ownership interests and expected contributions. The adult member should sign all contracts on the LLC's behalf. You can also file a statement of authority with your secretary of state specifying that only the adult member serves as the LLC's agent with the authority to legally bind it to contracts.
• An adult can be a manager: Alternatively, you can adopt a manager-managed structure for your LLC. Under this structure, the LLC is run by one or more designated managers. The managers can be LLC members, non-members/outsiders, or a combination of the two. The managers would be adults, while the minor members would be left as passive investors not involved in the LLC's day-to-day operations. In most states, member management is the default for LLCs. So you'll need to establish a manager-management structure in your LLC's articles of organization or in a written LLC operating agreement. In your operating agreement, you can customize rules and restrictions for the managers. While the managers will have the decision-making power, you can require that the managers consult with or get the consent of members on certain decisions.

Starting a business is no easy task. But with some thorough planning and active support, you can work through many of the initial hurdles. Because a minor-owned business presents unique issues, consider working with an attorney. A business lawyer can help you set up your LLC correctly, interpret local and state laws, and navigate the startup process.