Minors as LLC members

An “owner” of a limited liability company (“LLC”) is referred to as a “member.” Is it possible (or wise) to have a limited liability company whose members include a minor? Consider the following…

LLC members’ interests and rights…

As a starting point, New Jersey’s LLC Act does not expressly preclude a minor from being a member of an LLC. The Act defines “member” as a person having been admitted into the LLC. The Act further defines the term “person” to include an “individual”—without any qualification based upon age.

An LLC member typically receives an “interest” in the LLC—namely, the right to receive distributions from the LLC. The interest is personal property. It is well-established that a minor may acquire and own property in his or her name alone. In most cases, LLC members will also have the right to participate in the management of the LLC. Here’s where things can get a bit tricky.

Legal standing of minors in LLCs…

Although minors may possess rights and own property, legally, they have less standing to manage their financial affairs than adults. Similarly, although minors may enter contracts and thereby acquire contractual rights, the rules regarding enforcement of contracts between minors and adults are different than those for contracts between adults. Most notably, a contract between an adult and a minor is generally “voidable” at the option of the minor. That is to say, a minor may enforce an agreement against an adult, but the adult may not be able to enforce the agreement against the minor.

In a case that predates New Jersey LLCs, the court unequivocally ruled that an adult party to a partnership agreement could not enforce the agreement against his partner who was a minor. It is reasonable to predict that a court would rule similarly in agreements between LLC members. This is particularly problematic for LLCs. LLCs are regarded as “creatures of contract.” That is to say, LLC laws establish a very general framework for controlling the internal affairs of the LLC. The framework is a system of “default rules” that may, and often should, be tailored to the needs of each specific LLC by way of an “operating agreement” (i.e., a contract between the LLC’s members as to the relationship among the members and the conduct of the LLC’s affairs).

Concluding thoughts…

Insofar as operating agreements may likely be unenforceable against members who are minors, and because minors possess diminished standing to advance their rights, having an LLC with a member who is a minor will present significant, and possibly insurmountable, challenges. Please feel free to contact me to discuss potential strategies for structuring ownership of LLCs or other business entities to include owners who have not yet reached the age of majority.

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.