Running a family business is the most natural thing in the world--and the most unnatural. Handle it well, and it can make you rich, capitalize on bonds no ordinary colleagues could share, and keep your family employed for generations. Handle it badly, and it can instead keep lawyers like me employed for years.
If you've committed any of the following oversights, take care of them as soon as you can make a date with your lawyer. And if you're considering launching a company with your family members, don't even think about cutting corners and making these potentially fatal mistakes:
1. You mix your family finances with the business's.
A lot of family businesses start out as a side job or a hobby that eventually turns into a money maker. When you start to outgrow that stage, you need to look into creating a legal entity like an LLC or a corporation. This is especially important if a number of family members might be liable, as would be the case if, say, they signed for loans or contributed cash or otherwise could be considered partners. Without this protection, you all could end up bankrupt if something goes wrong.
For most small family businesses, an LLC is a great choice. It gives personal liability protection like a corporation, without formalities like a Board of Directors. An LLC is taxed as a pass-through entity, so business profits flow through to the owners and the LLC pays no separate tax on profits. Also, having a legal entity allows for easier transition planning.
2. You muddle along with no employment agreements
You may not want to discuss with Dad what will happen if he calls in sick too many times or with Grandma how much she has to pay you, but everyone in a family business has to make their expectations clear early on--about employment, operations, even dissolution. And you have to put the agreements in writing. It may seem awkward to talk about it now, but it will be ten times more awkward after something goes wrong. And something will.
3. You never bother to get the license.
For most businesses, you have to obtain state and city licenses. Zoning permits or variances may also apply, particularly if you allow customers to visit your home office. It's usually pretty easy to find out the requirements--one visit to the state Dept. of Licensing website can get you all the information (and forms) you need. Business licenses are often inexpensive, but if you're operating without one, the fines can be pretty costly.
4. You have no succession plan.
The last thing you want to think about in a family business is what will happen to the company if you are hurt or die. It's no fun to think about, but you should consider who will run the business, either temporarily or permanently, if you can't run it. Spend time with this person and get them acclimated to what you do and how you do it--introduce them to vendors, suppliers, payroll, payment issues, website access, and a host of other contacts and tools they will need to take over. Let others know you've designated a successor and mention it in your Will.
Remember that if you do not have a formal business entity like an LLC, your business technically passes with you. With the right structures in place you can leave your ownership (or fractions of it) to your loved ones in your Will, and they can keep running the business without interruption. After all, that was the point of having a family business in the first place, wasn't it? To keep it in the family.
If you're thinking about starting a family business, give us a call at 253.858.5434 to see how we can be of service.