Do members in your family have complementing skills? Maybe someone has excellent managerial skills, someone else has an eye for marketing and another is great at sales. This is a strong trio of skills for success! Starting a family-owned business can be a great way to capitalize on your family's business strengths and meet a market need.
Family businesses have great potential for success as well. According to 2019 research from PricewaterhouseCoopers (PwC), 79 percent of family-owned companies reported that they expect to see steady growth in the coming years, while 16 percent claimed they are expecting to see drastic growth over the same time period.
Whether you're looking to form an LLC or another business structure, here's what you need to know about starting a family business.
5 Keys to Successfully Starting and Operating a Family-Owned Business
When starting a family business, there are some key things you want to focus on and agree upon to keep conflict at a minimum. Often, the line between being family and business partners can become blurred. Having rules and guidelines laid out can help extinguish any family fires.
Below are five key things you need to think about, agree on and put down on paper so that you're all on the same page. These guidelines can also provide something to fall back on when conflict does arise.
1. Define Everyone’s Roles
Will all parties involved be partners? Will there be family members who do not want ownership of the business and simply want to be employees? Lay it all out and define what everyone’s role will be.
If there will be a partnership between family members, how will the equity be broken out? Will it be evenly, or will someone hold more equity than others? Define the percentages.
You also want to look at everyone’s skill sets. How will the company be divided up and what roles will everyone hold? If you have someone skilled at finding customers, let them head up sales. If someone is good at marketing, let them run social media. Define all roles and make sure everyone agrees.
2. Agree Upon the Compensation Plan
How will everyone get paid? Will everyone have a salary? Will some work at an hourly rate? Will there be a percentage of profits shared? What will those numbers be? If there's one thing that can divide a family and destroy a family-owned business, it's money issues.
Ensure everyone in the family-owned business is paid fairly and everyone understands how they will financially gain from the company and the work they put forth.
3. Lay Out How Conflicts Will Be Resolved
As mentioned earlier, money issues can cause conflicts to boil over in a family-owned business. But many other disagreements can take place when running a business. Day-to-day operations can become a problem, bills, disagreements, customer service issues, lack of inventory, egos...the list goes on and on. The bottom line is that there will be conflict — expect it.
The good news is since you're a family, you've likely had to resolve conflicts together in the past. Consider what has worked well for your particular family and let that inform your business conflict resolution plan. Will you hold a meeting and sit down with all stakeholders and discuss how to work towards a resolution? Or will all family members who are part of the business be involved?
Make the decision you feel is best for the family and the business, and write down how you plan on resolving conflicts when they arise.
4. Outline an Exit and Succession Plan
When someone leaves the family-owned business, what happens? If one member leaves and owns a certain percentage of the business, what takes place? Do the other members need to buy them out? Will they allow the family member to leave and maintain part ownership in the company? These are things as a family you need to sit down and discuss. Once you figure out how things will take place, be sure to put it in writing.
Additionally, what happens when someone is old enough to retire and wants to pass along the business to one of their kids or sell the business entirely? How will that take place and how will the transition go should it be agreed upon?
The PwC survey mentioned earlier expected that 39 percent of family-owned businesses would experience acquisitions or mergers this year. That said, in order to see an exit, you need to have a strategic plan in place. According to the survey, 27 percent of family businesses have no such plan in place.
Figure out both an exit and succession plan that will minimize hurt feelings and help eliminate future disagreements.
5. Set Work and Home Boundaries
One of the hardest things to do is separate work and home life. It can be easy to bring work home when juices are still flowing, but this can interrupt the need for separation that allows everyone to unwind and focus on family time.
Set clear work and home boundaries. For instance, if the business closes at 5 p.m., agree not to discuss business matters until you start work again the following morning. Lay out these boundaries ahead of time, so they are understood and followed by all parties.
Family-Owned Business Ideas
Does your family want to start a family-owned business, but are unsure what type of venture everyone wants to get involved with? Here are some ideas to help get the wheels turning in your head.
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What Are Some of the Best States to Start a Family-Owned Business?
Seek Capital analyzed all 50 U.S. states to determine which were the best for starting a business. Using criteria for each state such as the growth of the working-age population, the unemployment rate, the business tax climate, venture capital deal flow, GDP growth, cost of living and business survival rates, they determined the top 10 best states for starting your business in 2020:
Each state has its own unique benefits for entrepreneurs and those looking to start a business. There are new business incentives out there that can help get your business started. Do some research and look into what incentives your state provides and see how you can take advantage of what’s available. Additionally, Incfile covered the top recession-proof states to start a business.
How Will You Pay Taxes as a Family-Owned Business?
One of the most confusing aspects of starting a family-owned business is taxes. If there is more than one partner in your LLC or S Corp, taxes due will need to get split according to the percentage of the business you own. For instance, if you own a 40 percent stake in the business, you will be responsible for 40 percent of the taxes due.
You may also need to pay federal income tax, FICA tax and FUTA tax (Federal Unemployment Tax). For instance, if a spouse is employed by a spouse, or a parent is employed by a child, all taxes need to be paid except for the FUTA tax. If a child is employed by a parent, and the child is under the age of 18 or the business is 100 perfect family-owned, there is no FICA tax withholding. If they are under the age of 21, there is also no FUTA tax to pay.
Confused? You’re not alone. If you operate a family-owned business, it is recommended that you work with a tax advisor, accountant or CPA to make sure everything is squared away with your business taxes. Incfile's Business Accounting service offers a free consultation, and we can help you make sense of the complexities of taxes.
Should You Start a Family-Owned Business?
There are some benefits to staring a family-owned business. If these appeal to you, going into business with your family members may be right for you.
You get to work closely and be with your family every day
Everyone is equally invested in seeing the business grow
Loyalty is rarely ever in question
The work environment can be more relaxed
You can pass the company on to each generation to keep it in the family
As a family, you work as a team and are willing to wear multiple hats to ensure the success of the business
If you're ready to pursue starting a family business, Incfile can help you start your family-owned business and get you up and running with a business entity type that makes the most sense for you.
Matt Weik is the Founder/Owner of Weik Fitness, LLC and is a well-respected fitness expert/author with a global following. He’s a certified strength and conditioning specialist, personal trainer, and sports nutritionist. His work has been featured in over 85 fitness magazines and over 1,500 websites. You can contact Matt via www.weikfitness.com or on his social channels found on his website.