How to Start a Family-owned Business: Keeping It in the Family:

It wouldn’t be an understatement to say that family-owned business is synonymous with American business. Eighty-seven percent of American businesses are family owned. You read that right: 87%. That means that family-owned businesses employ a huge portion of the U.S. workforce—62% to be exact. And to top things off, family-owned businesses make up 64% of the GDP (gross domestic product). 

Thinking about joining the 87% of American businesses that are family owned? If so, read on to learn how to start a family-owned business and what to consider before beginning your entrepreneurial journey.

4 Things to consider before starting a family-owned business

From having brainstorming sessions to handling the nitty-gritty details, there are a lot of boxes to check before your family business can get off the ground. Here are four things to consider prior to starting your family business.

The graphic is titled "Questions to ask when creating a family business" There are four steps mentioned here. The first step is to talk to your family. Think about asking some of the following questions: What's the business idea? Does the family agree on the purpose of the company? What skills are present in the family? The second step is to structure your business. Think about asking some of the following questions: Is there one owner or multiple owners? Who gets to make decisions? The third step is to fine-tune roles and responsibilities. Think about asking the following questions: How iwll you define and award good work? What role will non-family employees pay in your business?. The fourth step is to plan for the future. Think about asking the following questions: How will you distribute profits when ownership changes? Who can become an owner or part of the governing board?

1. Talk to your family

It’s no surprise that the first way to start planning a family business is by discussing the details with a conversation. Open lines of communication are always essential, especially in business. To simplify things and make sure everyone is in the loop, talk with all interested parties at one time. 

The first conversation doesn’t have to be formal. But it should help lay out what everyone thinks about the new business venture. Here are some questions to ask:

  • What is the business idea? First things first: Work together to come up with a business idea. If you need help narrowing down options, think about the current market, your community’s needs, or something that falls in line with your family’s interests. Whatever business idea you decide on, make sure that it is something you’re all excited about.
  • Is everyone on the same page about the purpose of the company? You may find different ways of thinking. Some family members want to focus on company growth while others want to make some extra cash. 
  • What unique skillsets does each family member have? Each member will have a different background, education, and set of skills. Understand what these skillsets are and use them to better your business. For example, don’t overlook the aunt that’s good at numbers or the cousin that’s great with customers. It’s also possible that some family members don’t work well with others. Be honest and work hard to make the best situation possible for everyone

2. Structure your business

Once you determine which business idea you and your family members are going to pursue, it’s time to talk structure. Business structure, that is. 

This may be the first meeting you have that feels formal and that’s OK—this is a serious conversation that gets you one step closer to starting your business. There are a few business structures you should consider before you get the ball rolling:

  • Sole proprietorship. One family member owns and runs the company. This can be a great strategy with the right leader in charge. Sometimes you need to make quick decisions or take calculated risks. If there are too many people with decision-making power, everything can grind to a halt. 
  • Partnership. A chosen group of family members have ownership. You can choose from two types of partnership agreements: a general partnership or a limited partnership. The multiple perspectives in a partnership can help keep the business fresh, but you’ll have to have clear rules to help things run smoothly. Partnerships have some resilience built in. Since there’s more than one leader, if things go wrong someone is always there to pick up the slack. But, depending on your family there may be some friction on who’s in and who’s out of the partnership.
  • Limited liability company. There are two types of limited liability companies—single member and multi-member. You can choose a single family member to run things or multiple family members. A limited liability company gives liability protection to all members, so you won’t have to worry about business lawsuits affecting member bank accounts.
  • Corporation. There are two types of corporations to consider—S Corps and C Corps. Like LLCs, corporations allow shareholders limited liability protections. Ownership in a corporation depends on the number of shares a shareholder has. If shares are concentrated in one person’s hands, they have a controlling interest in the company. You can divide shares between family members (while collectively keeping a majority) if you choose to have multiple family members make business decisions. 

Distributed ownership and concentrated ownership are different ways to understand organizing an LLC or a corporation. Distributed ownership allows anyone in the family to be an owner and make decisions for the company. Concentrated ownership allows anyone to be an owner but restricts decision-making to a few family members. You can choose either an LLC or a corporate entity and then decide how ownership or shares are distributed to your family members. 

In many ways, governance goes hand-in-hand with your business structure. A good system of governance helps family members have a say in business decisions in a structured way. Family governance can look like a family assembly or board of directors, it just depends on your family. The goal of family governance is the transparency of roles, rights, and responsibilities of family members. 

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3. Fine-tune roles and responsibilities

Managing employees is tricky to begin with. When they are family members, it’s even more challenging. 

Nepotism can be risky for a family business, so you should work hard to make job requirements, duties, and reasons for promotions and demotions as clear as possible.

To help with transparency when employing family members, think about:

  • Creating a clear hierarchy so that duties and roles are understood
  • Using performance reviews regularly to check in on employees and track their progress

In addition to hiring family members, you can consider also doing the following to fine-tune roles and expand skillsets:

  1. Encourage your team to expand their knowledge. To encourage your team to expand their skillsets, you may encourage employees to go back to school, take courses, or participate in training. You may decide to require specific education or training for certain roles. And to sweeten the deal, think about creating an employee training reimbursement policy or offering educational assistance
  2. Hire experienced workers from outside the family. You always want to hire the best workers possible to help your business thrive. Hiring outside talent can take your family business to the next level by giving you additional expertise. Not to mention, it can help balance your business when it comes to family.

4. Plan for the future 

All good things must come to an end. Succession planning can be difficult to talk about but is a must for a family-owned business. Succession planning helps a business prepare for the future. Plans can cover many topics, including: 

  • How to distribute profits
  • Who can become an owner or part of the governing board
  • How ownership stakes are distributed
  • Who has voting rights

To make succession planning as easy as possible, make sure to:

  • Have an open conversation with family members
  • Define everyone’s roles in the succession process
  • Explain the succession plan to the entire family 
  • Be transparent about the processes 

In the end, it doesn’t matter what your family business sells or who’s in charge. It only matters that your family is in it together and works hard to make your business dream a reality. With just a little bit of planning and some (OK—a lot of) hard work, your business will be on track to success.

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