The very quick answer is that yes, a minor child in the United States can be an owner (or part owner) of a Company, provided the Company doesn’t have rules or provisions in its Operating Agreement (for LLC’s) or Bylaws (for Corporations) that say otherwise.
There are many practical issues, however, that one should be aware of before permitting a minor child to own a Company.
Contracts Signed by Minor Children are Voidable (not Void)
If a minor child maintains some level of ownership interest in a Company, and that minor child is involved in the management or day-to-day operations of that Company, any contracts the child signs may be voidable and therefore not enforceable as against the minor child, even though the minor child can enforce the contract as against the other, non-minor party.
Think how this can impact employees, contractors, customers or partners.
If you are an owner of a company and considering permitting a minor child to take an ownership interest in your company, this voidability issue can be challenging. How can you enforce an Operating Agreement or Shareholder Agreement as against a minor child? What would most likely happen, is that the child will continue to maintain an ownership interest, although any duties and obligations forced on the minor child in an Operating Agreement or Shareholder Agreement would be voidable by the minor child.
In other words, the minor child (or his or her parents?) would be able to ignore clauses that might otherwise be really important to the other owners: rights of first refusal, duties and obligations like notice, non-compete and more.
Note that if the minor child misrepresents his or her age, some jurisdictions may bar an attempt at voiding the contract, either through statute or estoppel, though this is not universally accepted. Upon disaffirmance, generally the minor child must return any consideration in their possession (or collected on their behalf).
The lesson here is, if you are an owner in a company, and the company is considering permitting a minor child to take an ownership interest in the company, make sure the parent and/or legal guardian signs relevant corporate paperwork on behalf of the child to ensure it is enforceable as against the minor child.
Ownership in a Company Creates Tax Obligations
Despite the fact that a minor child can void a contract, a minor child cannot navigate around tax obligations and reporting requirements. Worse, parents or legal guardians can become liable for a minor child’s lack of reporting and/or paying taxes associated with ownership in a company.
This means making a minor child the owner of a company thrusts potentially challenging tax obligations on the minor child, as well as potential tax liability on the parent(s) or legal guardian. It’s really important to understand the implications here.
First, let’s briefly talk about the “tax status” of a company. A LLC has four possibilities: Disregarded, Partnership, S-Corp and C-Corp. Only Disregarded tax treatment eliminates reporting requirements. Partnership, S-Corp and C-Corp can thrust tax reporting requirements on a minor child, which could be very burdensome if the child isn’t already dealing with taxes or otherwise have someone assisting. If the minor child simply fails to file, this can result in liabilities transferred or imputed to the parents or legal guardian.
Disregarded tax treatment is only available to LLC’s with one owner (or a husband and wife owners in a community property state, like New Mexico). This means if you let your minor child become an owner in your company, your minor child will have the burden of tax filings, unless that entity is taxed as a Disregarded entity (which can only happen if the child is the sole owner of that LLC).
Furthermore, Disregarded, Partnerships and S-Corp tax treatments are considered “pass through”, which means the profits and losses of the company “pass through” to the owners. Even if the minor child receives no cash from the company, the minor child could receive a tax obligation in the form of profits.
Let that sink in: If a company makes money, reinvests that money in inventory or equipment, and makes no distributions — there are still profits, and those profits are apportioned to the owners creating a tax obligation the minor child may not have the means to pay.
This can have some interesting consequences for the parents and legal guardians: In most circumstances, the parents or legal guardian of a minor child can be held liable for the tax debts or obligations incurred by their minor children, and can incur tax liability if the minor child fails to file his or her taxes (or files erroneous or fraudulent taxes to the IRS or state taxing authorities).
The lesson here is, as a parent or legal guardian, to make sure the minor child receives all the proper paperwork to file and pay accurate taxes, and that the child receives the help necessary to do this timely. Don’t make this the minor child’s responsibility.
Beware Divorces and Helicopter Parents
In all circumstances, the parents or legal guardian can “step into” the role of the minor child at any time. No matter the agreement established ahead of time (unless signed by a parent or legal guardian), remember that it is voidable. This means a parent or legal guardian can decide to take action on behalf of the minor child, and assert themselves in the corporate decision making or worse, selling their ownership interest or causing other problems in corporate management.
Such a parent or legal guardian can also force themselves onto a bank account, and withdraw corporate funds.
If you have a certain understanding with the parents of the minor child, but those parents end up divorcing, expect a fight on your hands. One parent may demand the minor child get bought out, so as to collect any monies associated with that minor child’s ownership interest. Or, one parent may simply decide they want things done differently. It’s hard to predict and hard to control.
The lesson here again is to make sure the parents or legal guardian sign the appropriate paperwork to ensure they cannot change plans or take unilateral action against the company in the name of the minor child.
Better Ways to Transfer Ownership to Children for Estate Planning Purposes
If your primary concern is a desire for your children to take an ownership interest in your family business, then you should talk to an Estate Planning Attorney to discuss options.
The two most common options are (1) drafting a Will that ensures ownership in your company is transferred to your children (or whomever) upon your death, and (2) establishing a Trust that includes your children as beneficiaries.
Both options can be simple or complicated, depending on your unique circumstances, but they help you steer around the issues and difficulties mentioned above.
Law 4 Small Business (L4SB). A little law now can save a lot later. A Slingshot company.
