What should I consider before starting a family business?
There are many benefits of working with family. Chances are that you and your family member already have a good relationship, so you probably enjoy working together. The other person also likely already has some knowledge about the business or can provide other value.
Also, family members often have a greater desire to work hard with one another. They are usually invested in the family business and want to see it succeed more than the average employee. In most cases, family members are investors and key partners in the company who work with you toward a common goal. That can make long-term planning easier, but can also make day-to-day decisions simpler.
Of course, running a business with family might not always be a positive experience. By considering the following drawbacks ahead of time, you may be able to prepare properly for them:
- Working with family can be distracting.
- Work conflicts can follow you home.
- Old arguments and grudges can create work conflicts.
- Family members might ignore rules and standards that apply to other employees.
- Family members might not have the precise skills or knowledge the company needs to be successful.
- Family members might not take criticism well, even if it is given respectfully.
Problems that arise at work can get very messy between family members, even if you have planned well. Resentment about other, unrelated events or long-term issues can cause work-related arguments to get even more heated. It may help you to know the legal actions you can take before you open the doors to your business to protect each family member's rights and interests.
A Business Plan is a good place to develop long-term goals for the company. Creating a formal Business Plan before starting your business can be an excellent way to make sure everyone is on the same page about the company's main direction.
How can I handle disagreements in a family business?
Disagreements usually happen in any business, whether you are working with family or not. Having a plan to resolve disagreements from the start might help you avoid a bad result that can affect your relationship for years. In general, while it may seem formal, having a set method for dealing with conflict is often the best way to go. Below are a few ideas for how to do this.
Have regular check-in meetings.
Regular family meetings can help everyone who has invested time and money stay on the same page about what is happening in the company. It can also give everyone a chance to speak up and face problems head-on. Communication is often a huge part of problem-solving, especially when dealing with big disagreements that can seriously affect the company.
Create a formal process for working out disagreements.
Having a set way to talk about and solve conflicts can be extremely helpful. If you agree to this process long before any arguments happen, it can give everyone a way to calmly and clearly think through a conflict. A process that involves input from other family members or a neutral person who is not involved in the business can be helpful. In the end, this process may keep you from going to court.
Develop a Code of Conduct.
Your business documents should set out the basics for your Code of Conduct. For example, if you have an LLC, your Operating Agreement should list many of the basic ways you run the business and what you and your partners expect from each other. You can also write a less formal Code of Conduct that helps your family members agree about these things as well.
Create a formal exit plan.
Sometimes, a family member leaves the family business, either by choice or due to events they cannot control. Before this happens, it is wise to have a written plan for dealing with their part of the business. For example, if a family member suddenly passes away, they may have information in their Will or Living Trust about how their business role and financial investment should be handled.
In this plan, your family might also want to include options that let family members choose to leave or be removed. An owner might also face specific problems if they get divorced, even if the spouse is not a part of the business directly. Sadly, there might be times when you must use the plan you have written. These events might be decades down the road, but it is usually better to consider them now instead of watching your business fall apart because there was no exit plan.
How should I structure my business when partnering with a family member?
There is no right or wrong way to structure a business with family. Each situation is different, so it is a good idea to talk to a lawyer about the different business formation options available to you. They can walk you through the pros and cons of each type of business entity and advise you on which entity (LLC, corporation, or nonprofit, for example) might be the best fit for your situation.
Before choosing a business entity, you may want to remember that the way you structure your company can affect how much say each family member has. For example, if you have a general partnership, each partner will likely have more input on how the business runs than if you structure the company as a corporation with silent investors. Ask yourself:
- Does each person want a full say in day-to-day operations?
- Would some family members prefer to be an investor rather than an active partner?
- Does it make sense to have levels of ownership?
- Do you want more than one person making major decisions for the company?
The answers to these questions can help you decide whether to incorporate, start an LLC, create a partnership, or simply ask family members to invest in the company as a whole.
What legal documents should I prepare before starting a business with relatives?
The legal documents you might use in a family business are usually just like those you would use in other types of businesses. For example, you typically need formation documents, such as Articles of Incorporation, Bylaws, or an Operating Agreement. In a partnership, you will likely need a Partnership Agreement. A Non-Disclosure Agreement might be a good idea as well.
You might also want to consider certain estate planning documents, such as a Power of Attorney or Last Will and Testament. These documents are often more important in a family business than in other businesses.
How do I keep from mixing business and personal finances?
Overlapping your personal finances and business books and records can lead to a lot of problems. You may be able to protect your personal assets and financial information by formally structuring the business and taking steps to keep them separate. The following best practices can help ensure you don't mix your personal and business finances:
- Do not use a personal bank account or credit card for business.
- Open separate business credit card, checking, and savings accounts.
- Avoid making personal promises to handle business needs.
- Transfer the titles of business assets, like real estate and vehicles, to the business.
- Get a tax professional to help with yearly and regular tax preparation and filing.
- Consider hiring a bookkeeper, at least every three months, to help with taxes and other requirements.
Some of these tips are easier said than done. However, working hard to separate your business and personal lives can help prevent serious trouble if the business fails or the family cannot get along.
Reach out to a Rocket Lawyer network attorney to get personalized advice and answers to your legal questions.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
