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There are many positive reasons for starting a family business, including earning income, working for yourself, employing family members and having a business to pass down to the next generation. And, when you hire your children, they gain work experience as they earn income. You might even be able to benefit from family business tax breaks.

However, starting a family corporation takes time and careful consideration. Here are some things to know before starting a family business.

Develop a family business plan

Before jumping into any business, consult with trusted legal, tax, and business advisers and develop a business plan. This should be put in writing and distributed to all stakeholders so the venture's operations and goals are transparent. Here are some things you could include in the business plan.

  • Define roles: In the excitement of starting a family business, some family members may have different ideas of how to run it. Determine who will assume each role, and what that role entails. Detail who reports to each manager so there’s no confusion.

  • Compensation: Determine how compensation is awarded, whether it’s a salary, hourly wage, percentage of profits, or something else. Make sure each employee, family or otherwise, understands how compensation works, and make sure everyone understands relevant state wage laws.

  • Ownership stakes: Define the ownership stakes before opening. Are family employees working for a salary? Do they get a percentage of the business upon its sale or at a certain time? What are the family members’ voting rights on the company direction?

  • Exit plan: What’s the exit plan for each family member? For those starting out — whether or not they get a salary or ownership percentage — determine what happens if someone leaves the business. Without understanding this up front, a family member may think he or she contributed greatly to the business's success and is owed something. If that person does have an official stake in the business, you’ll need a way to decide what that stake is worth and how that person will be compensated if he or she wants to leave.

  • Create a succession plan: The business founders may want to retire or pass along the business and start something else. Before opening the business, consider who will be taking over, how the business will be valued (if necessary) and under what circumstances a founder or stakeholder may step down. You may need to make changes to this plan after the business is founded, but at this stage this creates a precedent that you can refine later. Having a plan in place can lessen hurt feelings or eliminate future disagreements.

Set ground rules for your family corporation

Determining the company culture will determine how you manage your business and increase the likelihood that things will run smoothly. Here are some ground rules you can consider.

  • Keep your work and personal lives separate. When mixing business and family, it’s easy for business to become the sole topic of discussion at home or at family BBQs. Non-family employees who consider themselves important to your business will be left out. They'll likely want their opinions considered, too, but may not know when or where to share them. Make it a family rule to talk business at work and have personal discussions at home.

  • Kids must have outside experience. While teens get great experience working at a family business, they should also get some outside experience before joining the company full time. Consider mandating that, after high school or college, any children wanting to join your business for the long term must get experience elsewhere. That will give them real-world experience and an understanding of how other companies run. Acquiring additional skills will help them when they join the family business.

  • Get outside advice. Family members aren’t experts in everything. You’ll want a lawyer to draw up business structure documents such as papers for a family limited liability (FLC) or family corporation. A lawyer or business consultant can also advise you on the family business plan, set up human resource programs — such as employee benefits, employee documents, retirement plans, health insurance, employment tax forms — and provide expertise your family members may not have.

  • Hire outsiders. It’s great to have family members involved, but don’t sacrifice the company’s best interests by keeping out non-family members who can bring value to the company and help it grow. An outside perspective may be just what you need.

  • Treat everyone equally. It can be hard to treat a nephew or child the same as an outside employee, but it’s important for morale to do so. Employees, whether they’re family members or not, appreciate when everyone is treated the same. It’s hard to feel motivated if you see that your actions are watched closely but someone else’s are not.

  • Start strong. In the run-up to your launch and early days of your enterprise, you’ll need to address such operational issues as hiring and succession, product development, logistics and technology platforms. In addition, you may also have to mitigate potential tensions that are unique to families.

Ensure family success

Starting a business can bring family members closer and allow you to build something together. These businesses can create wealth and opportunities, along with a legacy for future generations. Cover all the bases by going through these important steps, and ensure your investment is protected with small business insurance. Speak with a Nationwide agent about how these products and services can help you get started.

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