Running a family-owned business can present both advantages and disadvantages while competing in the marketplace. Family dynamics in a business can add complexity to operations that competitors may not be burdened with. However, the personal and financial payoff can be immense for businesses that overcome common obstacles and pitfalls of working with family members.
Practical and legal suggestions for successfully operating a family-owned business include:
Create a structure
Family-owned businesses often begin as a hobby or an idea among family members. As the business grows, it likely will not operate efficiently without some kind of structure in place. Lack of structure can cause many inefficiencies such as a lack of organization, miscommunication, and overlapping jobs — all of which will have a substantial impact on the bottom line. Of course, it is important that family-owned businesses take the typical steps in setting up an organization: register with the Secretary of State’s Office, create separate bank accounts, and develop a business plan. For most family businesses, a Limited Liability Company (“LLC”) is the best and least expensive entity option.
When starting the business, family members will contribute varying amounts of capital and labor. It is important to allocate ownership interests and set procedures for liquidating or transferring ownership. These kinds of issues can and should be decided and agreed upon in an operating agreement. Typical operating agreements include a “buy-sell” provision, wherein restrictions are placed on the transfer of ownership. In a family-owned business, when a family member decides to sell his ownership interest, a buy-sell agreement will ensure that other family members have the first option to buy that interest, because it is important that control of the business remains in the family. The creation of an operating agreement substantially lowers the likelihood of a dispute.
Beyond these basic steps, there are practical concerns that a family-owned business must consider that competitors may not. Each family member associated with the business should have specific roles and responsibilities. Make these roles as “official” as possible by creating titles and providing business cards. It would be prudent to require a family member to sign the same employment agreement that non-family employees sign, and subject family members to the same performance reviews as non-family employees. By taking these steps, family members will acknowledge their position and responsibilities, creating both motivation and accountability. Non-family members also will feel like they are treated fairly.
Don’t commingle family and business assets or decisions; adhere to corporate governance standards
For legal and practical purposes, it is important not to commingle family and business assets or decisions. As noted, you should register your business as an LLC or similar entity. One of the primary reasons for doing so is to create a legal entity that acts as a liability shield. The liabilities of the family business should not become liabilities of individual family members.
However, if family members do not respect corporate formalities, this liability shield can be lost through a legal process known as piercing the corporate veil. If a lawsuit is initiated, a court can hold family members individually liable to creditors of the LLC if there is no separation between company business and personal affairs. Do not allow family members to borrow company property for personal uses (such as vehicles), to write off personal expenses as business expenses, or to allow unrestricted access of company credit cards. On top of liability issues, these practices can cause problems with the Internal Revenue Service.
Adhering to common corporate governance procedures is also important, such as regular ownership meetings, the recording of meaningful minutes, and written authorizations of important business agreements and major transactions. Maintaining these practices will go a long way in operating an efficient family business.
From a personal perspective, it is also important to keep work and family life separate. Don’t confuse family decisions and business decisions. When you are running a business with family members, especially with a spouse, it can sometimes be difficult to differentiate between business time and personal time. Set boundaries with your family — for example, agree not to discuss business with family after 7 p.m. or during family events. These boundaries will help to ensure that there is not a breakdown in family structure or the efficient operation of the business.
Create a succession plan
After running a successful family business, there will come a point when you realize that someone else will need to take over operations. Do you wish to keep the business in the family or sell it to a competitor? Which family members have demonstrated the skills and capacity to successfully run the business? Will the transition include a change in ownership or just a change in leadership? These questions become exponentially more difficult to answer when multiple family members have an ownership interest and a say in the decision making process. Whatever decision is made, it is essential to create a written succession plan between all co-owners.
Conclusion
When operating a family-owned business, normal business practices should be followed: register an entity with the State, establish an operating agreement, adhere to corporate formalities, and establish a succession plan. But you must also consider problems that competitors will not — how to treat employee-family members and how to differentiate between work and family time. Successful family-owned businesses manage to consider and accomplish all of these aspects.
Will Wagner with Allison MacKenzie Law Firm specializes in legal Business, Real Estate, Litigation, Appellate, and Administrative Law. A native Nevadan and University of Nevada, Reno graduate, he earned his law degree from the Sandra Day O’Connor College of Law at Arizona State University where he graduated cum laude. He served as a law clerk to Justice James W. Hardesty on the Supreme Court of Nevada. He was admitted to practice law in Nevada in 2015, California in 2016, and Arizona in 2017.
