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Should You Open a Business With Relatives?

written by: •edited by: Linda Richter•updated: 6/2/2011

Many small business owners with great start-up ideas look to relatives to invest and help manage and run the business. Is involving family a good idea? If you decide to allow family members in, what should you be beware of? Here, Jean Scheid offers some must-have tips for success.

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    All in the Family

    Relatives and Money Every business I have ever owned involved at least one family member. Some businesses included my husband and me along with additional partners and, at times, relatives have been asked to invest into our adventures.

    Negotiating a family business is probably trickier than having an unknown partner or teaming up with an acquaintance. Why, you ask: There are some things you really have to pay attention to, especially if family members are part of your enterprise.

    From fights over money to who is in charge, a business that involves relatives usually means extra care must be taken.

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    Making It Work

    Families There are a few things you must do if you want to ensure your family company is a success:

    The Legal Stuff – Once you decide upon the corporate entity, and you must, have an attorney write the bylaws or operating agreements (if an LLC) along with articles of incorporation to clearly state percentage owned shares, management directives, financial decision rules and any other elements you need to ensure you have a legal contract to turn to in the case of a dispute. Make sure you name a person to be a mediator in the event disputes arise. Don't choose another family member, appoint someone with no interest in the business whom everyone respects.

    Policies and Procedures – Part of negotiating a family business is creating policies and procedures your company will abide by and agree to when it comes to hiring employees, benefits offered, hours of operation, management teams and the ever-important officer salaries. Even if you only create the simplest of employee handbooks, it’s important to spell out the rules. Include other elements such as family member qualifications or experience before allowing them to join the business—even if it’s just as an employee. Your business cannot hire every family member so be conscious about those in the family who have something to offer and who will be an asset to your company, not a bad apple.

    Favoritism – Just because Sam is your son and Donna is your daughter-in-law, if they are employees and not owners or partners, don’t treat them differently than other staff. This will make for an unhappy workplace and you’ll have a lot of turnover.

    Owner Rules – While your bylaws or operating agreement will set the stage on who will be responsible for what within your business, all family owners should sit down and create rules all will follow. Items to consider here are time off, vacations, emergencies, company vehicle rules, expense reporting, and other pertinent information. Look at it this way—try to think of any scenario where a disagreement may arise and set rules for how disputes will be settled. For example, if the owner rules say, “No two owners can take vacations at the same time,” then stick to that rule. Or, if expense reporting is required, state, “No owner shall be reimbursed for any company expenses until they complete and submit the required expense report with receipts.” Enforce the rules you set.

    Meet Regularly – You may have the entire partner/owner family working at or for the business, and in other cases, a family member may be just an investor or silent partner. Be sure to meet regularly to keep everyone updated, especially on financial decisions affecting the business.

    Don’t Run the Well Dry – Using the family business as a cash reserve is not only illegal for personal expenses, it will run the well dry—meaning you end up with no cash flow. Many the family-owned company attempts this, and it will only come back to bite you.

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    The Pros

    Consider the Legal Stuff A business that is owned and managed by family members offers unique opportunities. Some are advantageous and others not so much. Let’s look at the advantages first.

    Employing Teens – If you have children under the age of 18 who work part time for you, social security and Medicare taxes do not have to be withheld, so you don’t have to match them when paying your 941 taxes. Once they do reach 18, you will have to start withholding these taxes, however.

    Values and Vision – Often family members are like-minded and have the same values and vision about how they want the business to run. This camaraderie is very advantageous when coming up with ideas such as processes, product or service offerings, and office or business set-ups.

    Skill Sets – You’ve heard of families where everyone grew up and followed the same path such as going to law school or becoming a doctor. This works well in a family business, too. If your business is a restaurant and everyone in your family loves to cook or has restaurant experience, this can be a great benefit.

    Loans – Depending on how many family members are buying into the business, you may not require a business loan, which are often tough to get.

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    The Cons

    Passing Down the Family Business Some of the disadvantages of a family business include:

    No Downtime – Couples, siblings and other family members who work together all day long often take their work home with them, so there’s no downtime. The business is always on everyone’s mind, especially during tough financial times.

    Hire Me! – Many managers of family-owned businesses will feel like they have to hire every niece and nephew. Avoid this if you can. You can interview family members—but if they don’t have the skillset, they really won’t be the best candidate.

    Arguments – A family business, if not documented and contracted correctly with appropriate agreements on who is responsible for what, can turn a family sour. Make sure you treat this business the same way you would if going into business with an unknown partner. Get the help of an attorney—even if each investing family member uses his or her own attorney. You’ll be better off, as the agreements created will stand up in court if sour grapes turn to full blown arguments and lawsuits.

    Loans – If you find you will require start-up capital loans for the business, if only one family member has acceptable credit and the others are poor or so-so, it may be hard to find a lender.

    Negotiating a family business can be fun and enjoyable and a way to start a family enterprise you can pass down to other generations. Before you venture down this path, however, seek legal advice, make rules you all agree to and will stick by, and learn to keep work at work, without taking problems home.

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    References

    The author has been a business owner for over 17 years, and has experience in family-owned businesses.

    Image Credits:

    Family - Eric Ward/Wikimedia Commons

    Generations - Bandini/MorgueFile

    Argue - mzacha/MorgueFile

    Fight - Dee Golden/MorgueFile