How to Structure a Family Business
by Jennifer Xue
Remember the rule “keeping things separate between family and business”? It applies in everything related to a family business, including when creating the structure. At least seven things you should remember when structuring a family business.
First, use a formal legal structure.
Choose an LLC or an S-corporation, depending on various legal and taxation considerations. The key benefit of such legal structure is the protection to family assets it provides. In the case of a law suit, family assets would remain untouched. It also provides a psychological assertion that the family members are legal partners in the business.
Second, put things formally in writing.
The family business is founded on agreements, and the best ones are in writing. While many family members may be tempted to just “go with the flow” without any written agreement, because “we’re all family,” putting things in writing provides extra protection when things didn’t go as planned.
Third, develop a typical company structure with board of directors and business units.
Make sure not to create too many “jack or jill of all trades.” Every individual must have their own job descriptions and specific tasks and responsibilities. It’s possible that due to limited human resources in startup phase, that the posts are overlapping. However, who’s doing what must be clear from the beginning.
Fourth, ownership structure must be clear with shareholders’ agreements.
Ownership often causes conflict. For this, regulating how shares can and cannot be traded inside and outside the family should be clear from the beginning. Usually, the agreement would last for 15 to 20 years.
Fifth, create a family advisory board.
A family advisory board is especially useful in the event of transfer of ownership, where the founder still has a veto power in making important decisions. In other day-to-day decision making, the successors have the regular voting rights.
Sixth, develop employment policy for family and non-family employees.
Employment policy would be useful in the events of hiring family members that may or may not have the required qualifications. However, when the business also employs non-family employees, the policy should clearly state the non-discriminatory practices between family and non-family employees.
Seventh, create a holding company board.
A holding company board is intended to maintain stewardship of the business to be passed on to the following generations. It’s basically a fiduciary role, not an ownership role, where the family members are responsible to take good care of the business and not use it as a cash cow for personal gain.
Jennifer Xue is the Founder and Chief Editor of SiliconValleyGlobe.com.
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