Around 87% of all businesses in the U.S. are family-owned, according to Family Enterprise USA data. This should come as no surprise. After all, there are many benefits to going into business with a family member, said Davis Nguyen, founder of My Consulting Offer.
“There’s a lot more trust than someone you haven’t worked with before,” he said. “For example, someone who is family might be able to give access to the financials and bank accounts more easily than someone you haven’t worked with before.”
But there are disadvantages to consider, too. Here are five things to know if you’re starting a business with a family member.
1. Work on a Small Project Together First
Starting a business with a family member adds another layer of risk, said Ray Blakney, CEO and co-founder of the Live Lingua online language school.
“If the business doesn’t work out, it can cause rifts between family members,” he said. “Each person in the business partnership blames the other for the company not succeeding, which can create a lot of disharmony in the entire family.”
To avoid failure and resentment, Nguyen recommends testing the business relationship before making anything official.
“Do a small project together first,” he said. “If it works out, set boundaries so that business matters don’t sink into family issues that affect more than the family members involved.”
Make sure your project has a deadline. This way, you and your family member have clear expectations. If the project doesn’t go well, you can go your separate ways without resentment.
2. Decide How You Will Split Ownership and Voting Rights
Before launching your business, you need to answer several important questions: How will you make business decisions together? If you can’t agree, who will make the final call? How will you divide profits?
The answers come down to how you divide the ownership and profit distributions. Many co-founders want to split their company 50-50. But Jonathan Grossberg, a tax attorney and a tax and accounting specialist editor with Thomson Reuters, recommends a 51-49 division instead.
“You’re inevitably going to have disputes about something in the business, and someone has to be the decision maker,” he said. “If you’re queasy about somebody being the decision maker, that might show that there are trust issues and that maybe this isn’t the best person for a business partnership.”
If you do trust each other and simply want the relationship to be fair, Grossberg recommends splitting the voting rights 51-49 and then flipping the numbers for cash distributions. This will give one person slightly more control and the other person slightly more of the profits.
3. Hire Experts and Maintain Professionalism
Grossberg said it’s crucial to keep everything legal and professional in your business. This helps protect you from legal and tax-related issues later on. To maintain professionalism, be sure to consult a lawyer, a CPA and an expert in your business field from the beginning.
An attorney can help you document your business plan, decide on the legal structure of your business and craft an official agreement and Articles of Incorporation (or Articles of Organization for an LLC).
Your CPA can also advise you regarding the legal and tax structure of your business as well as best accounting practices. Consider hiring a bookkeeper to help you avoid mixing business and personal finances — a problem Grossberg and his colleagues see all too often.
“You need to have a business bank account, and it needs to be separate,” Grossberg said. “This is why you want to consider hiring a bookkeeper. The bookkeeper will, early on, keep you honest.”
4. Craft a Succession Plan
Before officially starting your business, plan for its future. What will happen if your business fails? What will happen if it succeeds — do you want investors? What about if you or your partner has to step down?
“Even if you’re young … it’s worth at least discussing and thinking about it,” Grossberg said. “At some point, one of the two of you is, unfortunately, going to want to retire or–even worse–become disabled or eventually die. So you have to think about that sort of situation.”
Your attorney can help you craft a succession plan that works for both of you.
5. Protect Your Relationship From Business Problems
Blakney urges co-founders who are family members not to let business stress bleed into their everyday conversations. To avoid this, try to maintain honesty at all times.
“Before even starting the first business plan draft, have a long discussion with your family member about how much you care about them and how you wouldn’t want any potential issues with the business to come between you both,” he said. “Let them know that your relationship is most important, and always be direct, open, and honest about anything in the business that is bothering you to prevent resentment.”
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