There is a specific IRS page that spells out how a family may and may not use a small business. The IRS specifically points out that the law permits a parent to own a single member LLC and pay their minor children directly without withholding taxes. This illustrates a powerful planning opportunity to shift income to children at a lower if not zero tax rate.
For any tax strategy to work, it must be done correctly and within the limits of the law. To understand how businesses and families can work together, it is vital to recognize how the IRS defines a "business." In essence a "business" is " . . . an activity carried on for a livelihood or in good faith to make a profit."
On the one hand, this means that for an activity to qualify as a business, it must be a genuine business activity. It cannot be a sham or fake. It must be more than a mere hobby. There must be intent to make a profit.
Such intent can be determined by how the business is operated and documented. One of the critical factors that can distinguish a real business from a fake business is the formation of a business entity such as an LLC. An LLC is an entity formed under state law for the purpose of conducting a business. It is a company. Its very purpose is to make money as a business. It must have a separate company bank account. It must keep business records and make business filings in compliance with state law. In general, an LLC must declare in the state filings what its business purpose and intentions are.
An LLC may conduct any lawful business. An example of a business that may work well for a family is a Life Coach business. The business classification for Life Coach is "Consulting: Personal and Lifestyle Coaching" NAICA Code 561311-16.
According to the Oxford Dictionary, A Life Coach is a person who is employed by somebody to give them advice about how to achieve the things they want in their life and work. A Life Coach partners with clients, helping them achieve their goals, overcome challenges, and make changes in their lives.
According to the Health Coach Institute, Life Coaches help people succeed in all aspects of their life including such things as:
- Physical well-being
- Emotional well-being
- Cognitive well-being
- Finding work / life balance
- Changing or beginning careers
- Managing stress
- Improving health
- Increasing confidence
- Improving communication
- Creating a business plan
- Starting a business
- Setting financial goals
- Buying a home
- Choosing a school or educational program
- Improving relationships
A crucial part of a Life Coach program is to learn by teaching. It is well established that when a person has to learn something well enough to teach it to others, their own knowledge and understanding increases. Let's consider how this would work as part of a family owned and operated business.
An appropriate business entity may, as part of its business plan, contract with other business entities and for a fee provide services such as life coaching. If the service provider is a single member parent owned LLC, and if family members participate in providing such services, it is the best of the best - a tax efficient money making business.
There are rules, and they must be followed. Our counsel is that the business should actually succeed at the goal of making a profit. It should make money. Within and in compliance with applicable rules, a single member parent owned LLC can compensate children directly without withholding taxes. Such an entity can be a powerful part of a family's business, tax and succession plan.
One of the best ways to determine if a business has a profit motive is for the business to in fact make a profit. The very fact that an entity provides a service, has revenue associated with that service, and pays people for their role in providing that service means, per se, that there was a profit and a profit motive. The tax advantaged nature of the compensation to the family members does not negate the fact that there was a profit.
Tax efficient compensation is good, but the real value lies in the human benefits. Such a business can instrumental in preparing the next generation to take over, run, and thrive at operating dynastic family business enterprises. The next generation will also develop the skills to develop their own new profit making businesses.
Living life with a business purpose is not only profitable, it is favored under the tax code. It's actually a beautiful thing to make money and pay taxes on the profits after deducting all the allowable business expenses.
When children learn how to do this, they become self reliant adults that produce their own wealth (and pay their own taxes), rather than lifelong dependents who merely consume and spend the wealth their parents built. Teaching the skill set of running a profitable business by running a profitable business is a self-perpetuating enterprise.
The tax favored compensation to family members is the tax collector's investment in creating future tax payers.
Small Businesses and Families © 2025 by Rick Durfee is licensed under CC BY 4.0 
Small Businesses and Families