Family Partners (Adding Your Kids or Parents as Owners)

As mentioned in other areas of this book, your family might benefit from adding children or parents as owners of your business. For example, you could make each of your adult children a 10% owner. They pay tax at their own, usually lower, rates, and you can surrender and use this ownership as a conduit to give them money that was heading their way anyway, just at a reduced tax effect.

Imagine helping them pay for basic living expenses, college or savings using business dollars while reducing your overall taxes? Nice, for sure, but it takes some planning, and the ownership must be legit. Could your kids gift some of that money back to you? Sure, it’s their money. But if the money comes back to you as a matter of course, the IRS will see it as part of the transaction and argue the kids were never really owners, which unwinds the whole thing.

For example, your child is 25 years old and earns $40,000 at their own job. Assuming an S Corp, your business has $250,000 of net business income after expenses, so a 10% stake sends $25,000 to your child’s K-1. Assuming that income qualifies for the full 20% Section 199A deduction on both tax returns, your child sits in the 12% bracket. If you sit in the 22% bracket (using brackets for the 2026 tax year), that 10-point gap on the shifted income saves roughly $2,000 a year. Your actual savings depend on both tax returns, but you get the idea.

A few strings come attached. Yes, the finer details before you blast off and make them owners-

• Your kids own the stock, so income is allocated and every distribution goes out pro rata. They get 10% of every dollar you take out, not just the dollars you feel like sharing. And they owe tax on their K-1 share whether the S Corp distributes a dime.
• Your own reasonable salary still gets paid first. You cannot starve your W-2 to fatten your kids’ K-1s. IRC Section 1366(e) specifically allows the IRS to reallocate income among family members when services or capital go uncompensated. LLCs taxed as partnerships have similar family partnership rules (IRC Section 704(e)).
• Handing over the stock is a real gift. Gifts above the annual exclusion, which is $19,000 per person for the 2026 tax year, require a gift tax return. That usually means a draw against your lifetime exemption rather than a check to the IRS. This is mostly not an issue given the value of your business and the minority portion of it including discounts for lack of control and marketability. Also, your lifetime exclusion is massive- only 0.3% of the estates actually end up using it all.

Can Your Kids Own Part of Your S Corp?

Yes, a minor can own shares in an S corporation (usually through a custodial account or trust) or an interest in an LLC. The kiddie tax is the problem. Unearned income above $2,700 for the 2026 tax year gets taxed at your rate, not theirs (IRC Section 1(g)). It applies to children under 18, and to 18-year-olds and full-time students under 24 whose earned income does not cover more than half of their own support. K-1 income from a business your child owns but does not work in is unearned income, so for younger kids this usually goes nowhere.

You might hear that having your kids materially participate in the business fixes this. It does not. Material participation is a passive activity concept. The kiddie tax asks a different question, which is whether the income is earned, meaning compensation for personal services (IRC Section 911(d)(2)). An S Corp K-1 is not compensation no matter how many hours your child puts in, and it does not count as compensation for an IRA contribution either. Partnerships are a different animal, since a partner’s share of profits can count as earned income to the extent it comes from their own services. Even then, the family partnership rules still apply, and hours alone do not get you there.

The path that works is wages. Pay your child a reasonable wage for real work, and that W-2 is earned income taxed at their rate, sheltered by their own standard deduction and eligible for a Roth IRA. Yes, they can gift some of it back to you for your bar bill (once, not as a standing arrangement otherwise it is a sham gift) or put it in that Roth IRA. We prefer the former naturally. One wrinkle is that an S Corp paying your child gets no Social Security and Medicare exemption, which is why the family management LLC enters the conversation. Chapter 11 covers paying your children in detail, and WCG CPAs & Advisors runs the numbers for your family in our Paying Children and Spouse session.

Bonus round. You can still claim your child as a dependent as long as they meet the age test (generally under 19, or under 24 if a full-time student) and do not provide more than half of their own support. How expensive are kids? Really expensive! The word “support” is very interesting. Here is an example. Your 17-year-old earns $20,000 and puts $15,000 into savings to one day buy a house or pay for college. They also have $12,000 in living expenses. Money in savings is not support, so if you pay $6,001 of those expenses, your child provided less than half of their own support and remains your dependent. Seems a bit silly, but it is good tax planning just the same.

Mom and Dad can play too. Distributions and K-1 income flowing to a retired parent get taxed at their rate, which is often lower than yours. Watch three things before you load them up-

• Social Security. Extra income can make up to 85% of their benefits taxable.
• The senior deduction. OBBBA added a $6,000 deduction for taxpayers 65 and older for the 2025 through 2028 tax years, and it phases out above $75,000 of modified AGI ($150,000 joint).
• Medicare premiums. Higher income today can raise their Medicare Part B and Part D premiums two years later.

And as with your spouse, an S Corp does not have to pay a salary to a shareholder who performs no services. Salary follows services, not ownership.

Let’s recap the idea of children and parents as owners. If you are going to give your children or parents $1,000, it takes about $1,316 of your pre-tax income in the 24% bracket. Run that same $1,000 through genuine ownership by a child in the 12% bracket and it takes about $1,136. You could even gross up the amount to cover their taxes and still come out ahead overall in cash (which is what we all care about).

Keep in mind that the juice might not be worth the squeeze. If you are going to deploy these tax strategies, another zero is probably needed. And the bigger question is not taxes at all. Are you ready to hand 10% of your business to a 25-year-old, permanently, with their future spouse and their future creditors in tow? Saving a couple thousand dollars a year is a small reason to make a very large decision.

Family Problems

Yuck but real. Thanksgiving becomes super awkward when the pressures of business ownership span family members including in-laws. A lot of discussion and even disagreements between business partners are absolutely necessary for successful business stewardship. But retreating to neutral corners is tough with the entire family watching.

Then there is human nature. You handed out ownership as a tax move. Your kids heard “we’re business owners now.” Suddenly someone wants to attend board meetings, review the books, weigh in on your new hire and ask why the company needs that truck. And here is the kicker. Owners have legal rights, including inspecting records, voting on major decisions and, in many states, suing you for squeezing out a minority owner. You meant it as paperwork. They see it as a seat at the table. More yuck.

You can soften this with planning. An S Corp can issue nonvoting stock to family members while you keep the voting shares, and it does not break the single class of stock rule as long as everyone’s distribution and liquidation rights are identical (IRC Section 1361(c)(4)). An LLC can do the same with a manager-managed structure where the kids are non-managing members. Pair either one with a solid operating agreement or shareholder agreement and a buy-sell provision. None of this stops the questions at Thanksgiving, but it does keep the decisions where they belong.

Wait! There’s more. If you get divorced from your spouse, it is crummy and a bit messy. You own a business interest with your spouse’s sibling, and a bit messy becomes a real problem.
Imagine owning a rental property with an in-law. You might not be able to exit gracefully; regardless of fault, your in-law is sitting on your ex-spouse’s side of the room and backing every play. You might not be able to buy them out either if the asset has appreciated substantially. Lovely, just lovely.