Establishing a company with family has its advantages and disadvantages. Discover how to prepare for and defend your company against difficulties here.
What you’ll discover:
What should I think about before launching a family business?
How should I manage family business disagreements?
When collaborating with a family member, how should I organize my business?
What legal paperwork should I prepare before launching a company with family members?
How can I keep my company and personal funds separate?
Entering into business with family members may be a rewarding experience. It might be a method to leave something useful to your children or to assist them in establishing themselves. It can also help to enhance family bonds in ways that practically nothing else can. Working with family, on the other hand, has some distinct legal and practical obstacles. Family members, for example, may passionately disagree on issues that a more distant spouse may not mind. If you’re considering of starting a company with family, whether it’s a sibling, parent, or spouse, it’s a good idea to understand the legal implications beforehand.
What should I think about before launching a family business?
There are several advantages to working with family. You and your family member presumably already have an excellent connection, so you probably love working together. The other individual is also likely to know something about the firm or perhaps provide value in other ways.
In addition, family members often have a stronger willingness to work hard alongside one another. They are often more involved in the family company and want it to succeed than the ordinary employee. In most situations, family members are investors and significant partners in the business, collaborating with you to achieve a shared objective. This may facilitate long-term planning while also simplifying day-to-day choices.
Of course, operating a company with family members is not always a pleasant experience. You may be able to appropriately prepare for the following downsides if you evaluate them ahead of time:
Dealing with family members may be exhausting.
Workplace disagreements might follow you home.
Workplace disagreements might be caused by old fights and grudges.
Rules and standards that apply to other workers may be ignored by family members.
Family members may lack the specific talents or expertise required for the company’s success.
Even if presented gently, family members may not accept criticism well.
Even if you prepare well, problems at work might cause havoc among family members. Resentment over unrelated incidents or long-term concerns might exacerbate work-related disagreements. It may be useful to understand the legal steps you may take before opening your doors to safeguard each family member’s rights and interests.
A Business Plan is a wonderful location to create long-term corporate objectives. Developing a formal Business Plan before beginning your firm is a great method to ensure that everyone is on the same page regarding the company’s overall direction.
How should I manage family business disagreements?
Disagreements are common in every industry, whether you work with family or not. Having a strategy in place to manage arguments from the outset may help you prevent a negative outcome that may influence your relationship for years. Although it may seem formal, having a structured strategy for dealing with dispute is often the best way to proceed. Here are some suggestions about how to go about it.
Have regular check-in sessions.
Frequent family meetings may assist everyone who has invested time and money in the firm keep on the same page about what is going on. It may also provide an opportunity for everyone to speak out and confront difficulties straight on. Communication is often an important aspect of problem-solving, particularly when dealing with major issues that might have substantial consequences for the firm.
Establish a systematic mechanism for resolving issues.
Having a consistent approach to discussing and resolving problems may be incredibly beneficial. If you agree to this approach ahead of time, it will allow everyone to think through a problem in a calm and straightforward manner. A method that includes feedback from other family members or a third party that is not engaged in the company might be beneficial. Finally, this procedure may save you from going to court.
Create a Code of Conduct.
Your company documentation should provide the groundwork for your Code of Conduct. If you have an LLC, for example, your Operating Agreement should outline many of the fundamental methods you manage the firm as well as what you and your partners anticipate from each other. You may also create a less formal Code of Conduct to assist your family members agree on these matters.
Make a formal departure strategy.
A family member may quit the family company by choice or due to factors beyond their control. Before this occurs, it is prudent to have a documented strategy in place for dealing with their portion of the company. For example, if a family member dies unexpectedly, their Will or Living Trust may include instructions for how their company function and financial investments should be handled.
Your family may also wish to include choices in this plan that allow family members to depart or be removed. Even if the spouse is not actively involved in the firm, an owner may face unique challenges if they divorce. Unfortunately, there may be instances when you must implement the strategy you created. These events may occur decades in the future, but it is typically preferable to prepare for them now than than watching your firm fail because there was no exit strategy.
When collaborating with a family member, how should I organize my business?
There is no right or wrong method to build a family company. Since every circumstance is unique, it is a good idea to consult with a lawyer about your choices. They can explain the benefits and drawbacks of each kind of company structure and how you may utilize it to address your unique difficulties.
When deciding on a business structure, keep in mind that how you form your firm might determine how much say each family member has. For example, if you form a general partnership, each partner will likely have more say in how the firm operates than if you form a corporation with silent investors. Consider the following:
Does everyone desire a voice in day-to-day operations?
Would some family members rather be investors than active partners?
Is it necessary to have different degrees of ownership?
Do you want more than one person making critical business decisions?
These answers might help you determine whether to incorporate, form an LLC, form a partnership, or just ask family members to invest in the firm as a whole.
What legal paperwork should I prepare before launching a company with family members?
Legal papers used in a family company are often the same as those used in other kinds of enterprises. Articles of Incorporation, Bylaws, or an Operating Agreement, for example, are often required. A Partnership Agreement is most likely required in a partnership. A Non-Disclosure Agreement can also be a good option.
You should also think about estate planning paperwork like a Power of Attorney or a Last Will and Testament. In a family company, these papers are often more significant than in other enterprises.
How can I keep my company and personal funds separate?
Interfering with your personal money and company books and records might cause a slew of issues. By properly structuring the company and taking efforts to keep them separate, you may be able to secure your personal assets and financial information. The following suggested practices will assist guarantee that your personal and corporate funds are not mixed:
Do not do business using a personal bank account or credit card.
Set up separate corporate credit cards, bank accounts, and savings accounts.
Make no personal obligations to deal with commercial issues.
Transfer ownership of corporate assets such as real estate and automobiles to the company.
Hire a tax specialist to assist you with annual and ongoing tax reporting.
Consider employing a bookkeeper at least once every three months to assist with taxes and other obligations.
Some of these suggestions are easier to say than to execute. But, working hard to keep your professional and personal life separate might help you avoid major problems if the firm fails or the family cannot get along.
