Keepin' it in the Family: How to Structure a Business With Your Closest Relatives
From mom-and-pop stores to sprawling corporations like Walmart, more than half of all companies in the U.S. are family businesses, according to data from Harvard Business School. While definitions of what constitutes a “family business” vary, the broadest definition is a business where multiple members of the same family are involved as major owners and/or managers.
I was immersed in family businesses at an early age, from my parents’ antique shop to my grandparents’ Mediterranean restaurant and Swenson’s Ice Cream franchise. Fast forward 20 years, and my husband and I have now launched, run and sold several businesses together as a team.
Many family ventures start as side projects and are pretty casual when it comes to formalities. However, since founding my first company and watching friends and relatives navigate their businesses, I've realized that family-run companies desperately need structure, and delicate family dynamics require careful planning.
For those of you thinking about a family business, go for it, but consider these tips.
1. Put things in writing
Entering into a business partnership should never be taken lightly. That’s true whether you’re starting up with a colleague, spouse or parent.
Sam Prochazka, an entrepreneur who's launched businesses with his identical twin, suggests putting everything in writing -- before the business begins. “Relying on handshake agreements, though tempting, leaves room for interpretation and disaster,” he says.
Drawing up a legal document like a Partnership Agreement or Operating Agreement will force everyone to deal with sticky matters upfront. Discuss salary and dividend payouts, as well as everyone’s expected work schedule, responsibilities and commitment. How will big decisions be made? What happens if someone wants to sell the company, can no longer work or gets divorced? These may be uncomfortable conversations for families, but it’s better to have them early on when there’s less emotion and stress involved.
2. Get a formal business structure
It’s important to house your business venture into a formal legal entity, like a corporation or limited liability company (LLC). This is particularly true when there are multiple family members involved in the business. The key benefit of a formal structure is it creates some space between the individuals and the business: Should the business be sued or can’t pay its debts, the individual owners can be protected from personal liability.
For the typical small family business, the LLC is a great choice in business structure, since it offers liability protection without adding the administrative formalities associated with a corporation. In addition, an LLC is typically taxed as a pass-through entity, and business profits and losses flow through to the owners’ individual tax returns.
3. Don’t mix personal and business finances
Small business owners invest so much of their personal time and money into the businesses that personal and business finances can become indistinguishable. However, you need to maintain separate bank accounts and accounting practices for business and family use. Once you have established an LLC or corporation for this business, keeping a sharp line between personal and business is mandatory, but it’s advisable for every business.
4. Don’t create two classes of employees
Unless you have a huge family with enough experience and expertise to fill each role, your business will depend on non-family members. The moment you bring in a non-family member into the business, it’s critical to treat everyone equally when it comes to hiring, salary, benefits and opportunities for growth.
Special treatment, even the perception of special treatment, to family members will de-motivate employees and create tension. And SCORE small business counselors advise to never put family members on the payroll if they can’t make a real contribution to the business.
5. Separate family and business time
The stress of running a business can wreak havoc on a relationship. After 20 years of building businesses with my husband, I've learned that it’s essential to make a clean break from being business partners at least once per day.
For example, make it a rule to not talk about business at the dinner table, on Saturdays or during family vacations. It’s OK if you need to break these rules -- occasionally -- for a quick check-in, but we try to limit these conversations to just a few minutes and then switch back to family time.
Creating a family enterprise isn’t right for every family, but I've found it incredibly fulfilling. A family company offers an incredible sense of identity and connection with each other and the business.
Just remember that even though your venture may have started as a casual conversation over dinner, you need to take the administrative formalities seriously. The health of your business -- and closest relationships -- may depend on it.