How to Properly Set-Up A Family Business

When it comes to starting a small business with family it can be a daunting task.  At times, being around family members can be very difficult and stressful at times.

Going into business with family members means that not only will you see them at home, but you will spend a lot of time with them at work as well.  There is a very thin line between staying professional when it comes to family business dealings.  Also, it is not advisable to allow your personal feelings and personal emotions to play a part in running a family business.  But, at the same token it can be the best thing to go into business with family because they have the same drive and ambition to want the business to succeed.

When deciding to start a business with family members, you must take certain things into consideration before doing so.  With a family business, you have to decide on the following:

  • Who will be in charge of the daily operations of the business?
  • Who will be in charge of sales and getting new customers?
  • Who will handle the money for the business?
  • Who will handle the firing and hiring of employees?

Starting a family business is the same as starting a business with strangers and friends, you have to be mindful of not allowing close ties and personal feelings to play a major decision in the daily operation of the business.  Family businesses are the main staples the economic stability of countries around the world.  Family businesses have helped to maintain families to create a sustainable source of income.  The key to a successful family business is to understand that the family must know how to run it like a true business.

The first step to starting a family business is to have an initial meeting to determine the type of business, the products and services to be sold, and the main operations of the business.  It is very important to set-up a support system when starting a family business which includes friends and colleagues who do not have close ties to the family.  Having a good support system will ensure that the family business is ran efficiently and effectively.

The next step to setting up a family business is to determine the best way to incorporate the business to protect the business assets and family assets.  By incorporating the family business with the proper governmental agency, will ensure that the business is protected, and the business and personal assets are protected.  With this type of protection, the family can enjoy being in business without the fear of losing everything.  Also, it is good to have the proper business licenses needed to conduct business in certain areas and conduct certain types of business transactions.

Here are the different types of incorporation that can be used for a family business to be seen as a legal entity:

  • Sole proprietorship: simplest business form and not a legal entity. The business is not legally separate from the owner.  The owner’s personal assets and obligations of the business are not distinguished.
  • General Partnership: This is the simplest form of partnership and is created when two or more individuals engage in business together for profit. A general partnership can begin with just a verbal agreement and handshake.  There is no liability protection in this form of business and every partner is equally liable for all debts and obligations of the business.  Also, the personal assets of each partner can be used to pay such debts.
  • Limited Partnership (LP): There are two classes of partners (general and limited). The general partners normally handle the day to day operations of the business and are held personally liable for the business debts and obligations.  Limited partners only contribute money and capital to the business.  The limited partners are not involved in the daily operation of the business.  The limited partner’s personal liability does not go beyond their capital contributions to the business.
  • Limited Liability Partnership (LLP): This business entity is a hybrid and similar to a Limited Liability Company (LLC). All partners in the business handles the daily operation and management of the business.  Unlike the Limited Partnership, Limited Liability Partnerships ensures that all partners’ personal assets cannot be used to satisfy the business debts and liabilities like an LLC.  LLP partners are ensured that they will not be held accountable for the acts of other partners (have personal liability protection).
  • Limited Liability Company (LLC): It is an unincorporated business that can be formed by one or more individuals with no personal liability for debts of the LLC. An LLC is unique because for statutory purposes it is treated like a corporation regarding limited liability of partners and partnership status for tax purposes.
  • Corporation: Corporation is an independent entity. The corporation is separate from the owners of the business because can contract in the corporate name, sue and be sued as the corporation, and buy, sell, and own property in the corporate name.  There is no personal liability for owners of the business because the corporation is responsible for its own debts and liabilities.  The business entity outlasts the death or disability of all stockholders.
  • S-Corp and C-Corp: Have the general guidelines as a corporation. Must be registered with the governmental agency similar to a corporation.  There is no difference between S-Corp and C-Corp for purposes of Corporate Law.  S-Corp does not have double taxation like a C-Corp.  C-Corp has double taxation because it is treated as a separate taxable entity and distributions to stockholders are generally treated as dividends.  S-Corp is the best avenue over C-Corp because it provides liability protection of a corporation while allowing tax treatment similar to a partnership.

Here are the general steps to consider when incorporating a small business with a governmental agency:

  • Step One: The formation documentation to incorporate a business is normally called the Articles of Incorporation or Certificate of Incorporation, it depends on the governmental agency terms used.
  • Step Two: The fees for registering a business as a company runs from $50 to $400.
  • Step Three: The normal waiting period to have the formation documentation approved by the governmental agency varies from four to six weeks (non-expedited services). But, for an extra fee a business can have their paperwork approved within a few days or even a few hours (expedited services).  Now in many countries and states, you are able to fill out the formation documentation online and this speeds up the approval process.
  • Step Four: Have to disclose certain information in the incorporation documentation such as the following:
  1. Company Name.
  2. Business of purpose both general purpose and specific purpose.
  3. Registered Agent.
  4. Incorporator- the person or company who is incorporating the business.
  • Step Five: Must have a registered agent who is the individual who can accept service of paperwork for the company.

These are just some general steps to take when deciding to incorporate your small business as a legal entity in your particular state or country.  It is advisable to consult with your attorney, accountant, and business consultant to determine the best incorporation form for your family business.

The third step in starting a family business is to get some kind of insurance for the business.  It is good to have insurance for the business to protect it from possible disasters like:

  • Natural disasters like fire and etc.
  • Negligent acts committed by employees.
  • Customers being injured on the business property.

With proper insurance, the family business can remain open and not be forced to close due to expensive lawsuits.  The business owner needs to ensure that they have the proper business insurance needed to operate the business in an efficient and effective manner.  There are many benefits to having insurance for one’s business.  Operating a business is very challenging without one having to worry about major financial loss or monetary loss due to unforeseen and unplanned circumstances.

Here are a few ways how insurance can protect one’s business from many common losses experienced by many business owners:

  1. Protection from property damage.
  2. Business won’t be interrupted.
  3. Will not have to deal with theft, personal liability, or employee injury.

Buying the right commercial insurance coverage certainly makes the difference between losing one’s business to a dissatisfied client in a lawsuit or recovering with minimal business interruption and financial impairment to the company’s operations.  Before buying any type of commercial insurance for your business, it is advisable to speak with an insurance agent to figure out which type of insurance will meet the needs of the business.

Here are some of the basic types of commercial insurance to consider for your small business:

  1. Commercial Auto Insurance: This type of insurance is purchased to cover all vehicles that are used for business purposes and business operations.
  2. Property Insurance: This type of insurance protects the business property from possible losses in any way.
  3. Liability Insurance: This type of insurance protects the business assets and personal assets of the business owner from different types of liability.
  4. Business Interruption and Continuation Insurance: This type of insurance provides coverage for business expenses associated with running a business, i.e. utility bills and payroll. This type of insurance comes into play when the business is out of operation for a long period of time due to fire or reasons beyond the owner’s control.
  5. Professional Liability Insurance: Better known as Errors & Omissions insurance provides protection to the business for damages as a result of professional advisor, employee, or board member due to negligence or failure to use due diligence.

There are many other types of insurance coverage a family business should consider to purchase to protect their business.  So, please speak with your insurance agent to figure out the best commercial insurance coverage for the family business.

The final step to starting a family business is to create the right dream team for the business.  The right dream team for the family business consists of the following members:

  • Accountant;
  • Attorney;
  • Insurance Agent;
  • Bookkeeper;
  • Business Coach;
  • Banker; and

Here are some important groups to have on the dream team for the family business:

  • Board of Directors;
  • Management Team;
  • Human Resource Management;
  • Legal Team; and
  • Support Team.

The business owner, of course, is the first member of the dream team because they are ones who start, develop, run, and grow the business.  Also, your employees play a valuable role in the daily operation of the business because without your employees how can the business run and operate smoothly on a daily basis.  An attorney is an essential key player in any business because of the legal implications in operating a business.  An attorney’s role can be best described as protector of your business from legal implications or legal issues that may come up unexpectedly.  An attorney’s duties can include: 1. Review and draft of business contracts; 2. Ensure your business is properly set-up as a legal business entity (LLC, Inc., Corp, etc.); 3. Represent the business in legal matters; and 4. Ensures that everyone is abiding by all the local rules, laws, and regulations in the operation of the business.

An accountant is essential to the daily operation of your business because the accountant deals with the finances of the business.  An accountant ensures that your finances are in order and ensures that your taxes are in order to avoid tax trouble.  An accountant ensures that the business is not audited by the IRS.  An accountant ensures that you properly record your profits, losses, and expenses for your business.  But, one important thing to remember, do not relay on your accountant alone to handle your finances and taxes for your business.  Ensure that you continue to have first-hand knowledge of how your accountant is handling your finances.  An accountant normally deals with your money transactions that occurred throughout your business fiscal year.  Good way to have first-hand knowledge of how your accountant is handling your finances is by setting up a system that enables you to organize and record your business financials on a daily basis.

A bookkeeper is good to have in the daily operation of your business because they ensure that the business finances are in order.  The bookkeeper deals with the record keeping of the business finances on a daily basis.  A bookkeeper is good to ensure that all employees get paid on time, all debts owed to creditors are paid on a timely basis, ensures that all taxes owed are paid (payroll taxes, Medicare, social security taxes, FICA, withholding taxes, etc.), and all monies owed to the business are collected on a timely basis.  The bookkeeper works hand in hand with your accountant to ensure that all the profits, losses, and expenses regarding the business are properly recorded.  Also, you should have a good relationship with both the accountant and bookkeeper because they are assisting you with the business finances.

You should have a good relationship with your banker because they are ones who assist you with opening an account for the business.  A banker ensures that you have the correct banking tools needed to run the business smoothly.  Also, having a good relationship with the local bank will ensure that the family business can receive the loans, lines of credit, and other financial tools needed to keep the business afloat financially.

An insurance agent is good to have because the family business will need insurance to protect the business from all kinds of problems and issues that may come up.  An insurance agent ensures that the business has the proper insurance to protect the business assets, personal assets, and financial future of the business.

It is good to have a business mentor for the family business whose has had similar business as the family business. A mentor is there to provide you with sound advice regarding the business and to answer any questions about running a business when needed.  A mentor will connect you with the right people and organizations who can assist in the growth and prosperity of the business.  A mentor is there as a friend, counselor, and teacher for you to learn and grow from as a small business.  Family is a good tool to have in running your business because they can assist with running of the business, provide you with customers, normally are your first customers, always provide you with finances to run the business, and are the best cheerleaders you can have in your corner.

Remember to have that dream team together and ready when starting your business because they are there to ensure that your business is a success and not a failure.

These are just a few steps to consider when starting a small business with family members.

Donya Zimmerman is a business consultant, mediator, and legal professional with over ten years of experience. Donya is also a public speaker and aspiring author.  She has a few books in the works that will be published and released in the latter part of 2015. The books will focus on entrepreneurship, small business, and daily devotionals.  She is owner of Family & Community Mediation and Business Consulting (FACMBC) and Powerful Biz Woman (subsidiary of FACMBC). Both are based in Baltimore, Maryland and were established in 2013. Services provided by FACMBC: Mediation and Conflict Resolution Services; Business Registration Assistance (Limited Liability Company, Corporation, S-Corp, Limited Liability Partnership, etc.); Business Plan Drafting Assistance; Business Certification Assistance (MBE, WOSB, 8A, 501(c) (3), Hub Zone, etc.); and Business Organization Assistance.  She is also a contributing writer to the Maryland Daily Examiner Newspaper. Donya Zimmerman has made article contributions to the Simply Inspirational Women in Business Journal for 2014 published by Dr. Cheryl Cottle. 

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