Implications of Starting a Family Business

by Thom Tracy

2 min read

There is no one you can trust more than family. However, it may not be the best idea to start a family business. There are legal, financial, and personal implications that need to be considered before launching a family business.

Legal Implications

To avoid any ambiguity in the structure of the business or an individual’s role within the company, ensure that everything is officially documented in writing. This cuts down on hearsay and confirms that everyone knows the structure of the company. It may be tempting to discuss the business and end the agreement with a handshake, especially when dealing with family, but this can lead to confusion and arguments in the future. Instead, draft a partnership agreement and have a lawyer review it prior to anyone signing the document. Not only does this ensure the agreement operates within the word of the law but that all partners in the business are signing off on the exact business structure.

When discussing the business with a lawyer, consider forming a limited liability partnership. This structure provides liability protection without having to go through the complicated process of incorporation. Profits and losses typically flow through to the owner’s personal income tax return, which can create tax advantages. You may want to speak with an accountant or lawyer regarding the benefits and drawbacks of a limited liability partnership agreement.

Financial Concerns

As with a sole proprietorship, it is crucial to keep personal and business finances separate. With a family business, it is even more important, so that one owner is not contributing too much or too little compared to the other owners. This can lead to resentment or entitlement if there is a significant difference between contributors.

Consider opening a bank account and business credit cards under the business name. Not only does this keep funds in the business separate, it is also a tracking tool for items bought for the business. It helps streamline accounting and makes it easier at the end of the fiscal period to track expenses.

Personal Conflicts

A difficult aspect of owning a family business is handling finances. To help reduce conflicts, treat all family members and employees equally. If a family member receives special treatment over other employees, it can lead to resentment and create tension in the workplace. Moreover, avoid giving a job to a family member simply because he or she needs a job. If the person does not add anything to the business, do not feel obligated to hire him or her out of sympathy.

Reiterating the separation of work and home life, try to avoid discussing work issues at family dinners or after hours. All entrepreneurs need time to unwind to avoid fatigue, so while it may be tempting to talk about a business issue over dinner, try to leave work conversations for the office. If some family members are not involved in the business, it separates them from the conversation and they may feel resentful.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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