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Starting a Family Business: Key Legal Steps You Need to Take

Hailey Cady by Hailey Cady
2 years ago
in Business
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Starting a Family Business: Key Legal Steps You Need to Take
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Starting a family business is very common. In the U.S., 5.5 million businesses are family-owned. For many, it’s easier to start a business along with family members since, presumably, they know each other best and can easily get along.

Many family business success stories encourage people to go this route over starting a business on their own or with friends. Many huge and popular businesses in different industries started out as family-owned businesses. Some notable ones include Walmart, BMW, Comcast, and Estée Lauder, among many others.

But starting a family business does come with several challenges, as with any other type of business. And to prevent some of these challenges, an aspiring family business owner must take the appropriate legal steps before kicking their business off the ground.

Determine a Business Structure

Starting a business with family members may start casually. One family member may have a eureka moment of a good business idea. And upon hearing this, other members may jump in and say they want to participate in it. But a casual conversation like that won’t cut it. Also, asking a family member to come work for the business isn’t

It’s important for the family business to have a specific business structure. This way, conflicts can be avoided in the future. Besides, a family business should be treated as it is: a business. The family business can be a sole proprietorship, a partnership, or an LLC. The organizational structure and hierarchy should also be specifically defined.

Create a Succession Plan

An individual creates an estate plan for a legal and smooth transfer of their assets to loved ones once they pass. In the same way, a family business owner must create a succession plan to secure the business if and when an authority transfer is needed.

Many problems may occur when transitioning a business from one generation to the next or when the head of the business is no longer able to fulfill their roles due to death, illness, or personal reasons. Thus, a succession plan is extremely important and should be created even before the business opens.

The business owner should create a specific process in choosing the successor of a business. For example, a profile should be created. It will detail the characteristics of an ideal successor, such as their competencies, skills, contribution to the company, etc. The plan must also specify the steps of the process of successor selection and preparation.

Construct a Clear Employment Policy

Given the nature of a business, it’s likely that the owner will hire people from within the family. For instance, if the eldest son of a family decided to start a family business, they could hire their parents, siblings, or cousins.

Working with family members and relatives can have its advantages. These are people who already know each other and are connected by blood. So there is already a bond between them prior to the business.

But this can also become a problem. For example, a family member may overstep the authority of the owner. A sibling cum employee might make executive decisions without the permission of the owner. Another common conflict is about money. Perhaps one employee may not be paid adequately or not paid at all for the work they put into the business.

A family-owned business is still a business and should be treated as such. Thus, the business owner must set clear employment policies. The owner should draft employment contracts that clearly define the employee-employer relationship and list the duties and responsibilities of each family member cum employee. The contracts must also clearly define the remuneration for each position.

Establish a Code of Conduct

Conflict can occur in any business, even a family-owned one. For example, there can be sibling rivalry within a family company that can strain the relationship between two or more siblings.

Like any business, a family-owned business must also have a code of conduct. It is extremely important as it reduces the possibility of developing conflicts between family members employed in the business. The code of conduct will also ensure that every employee, part of the family or not, is treated fairly and with respect.

The code of conduct must reflect the values of a family-owned business. It should also include procedures on how to address certain issues, including decision-making, communication issues, personal development, confidentiality, and so on.

Starting a family business is no walk in the park. It takes not just guts and courage but also legal processes for it to sail smoothly.

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