June 30, 2020
Did you know that family-owned businesses employ 60 percent of the U.S. workforce and create 78 percent of all new jobs? If you want to start a family business of your own, an LLC can be an ideal way to do so. After all, Walton Enterprises LLC, the family LLC that operates Walmart, is the largest company in the world by revenue.
Despite some family LLC successes, business owners should exercise caution when launching a new family startup. Any business venture requires a great deal of forethought. This might be doubly true when it comes to starting a family business. Too often, a family in business might take shortcuts in forming their company and, in the process, fail to safeguard the organization’s long-term future.
What is a Family LLC?
A family-owned LLC has two or more family members operate the company, differentiating it from a traditional LLC. Moreover, a family should have the majority of ownership stake in the business as well.
In many cases, the genesis of a family-owned LLC is an urge to invest. A family might be interested in entering the stock market or scooping up some real estate. But even if this basic setup describes your LLC’s goals, it’s critical that you don’t leave anything to chance.
Although every state in the U.S. recognizes LLCs, the regulations and restrictions behind them vary wildly from state to state. Family LLCs aren’t treated any differently from other LLCs. But be sure to research the registration process in whichever state you plan to form your LLC.
Benefits of Starting a Family Business
A family-owned business faces many of the same challenges as traditional LLCs. But it also offers a ton of benefits you won’t find anywhere else. Here are a few of the biggest:
- Save time and money on recruitment
- More reliable work performance
- Greater long-term employee retention
- Tax breaks for hiring underage family members
- More personal stakes in company success
- Increased comfort and familiarity
How to Make a Family LLC Work
You have a wide range of family businesses you can start. No matter the nature of your business, you’ll need these best practices to guide you in getting your family-run business off the ground.
File Paperwork Promptly
Depending on the nature of your business, you may need to obtain licenses, permits or other documents to keep your family LLC in compliance. If this is the case, don’t delay in getting that process started.
In many cases, you’ll need these before your LLC can operate legally. Your local county or city office — find out which applies to your company’s base of operations — can answer any questions you might have.
Failure to satisfy your compliance needs can result in a variety of unfortunate consequences. These may include simple penalties such as fines or loss of good standing. But they can also extend to civil or criminal prosecution as well as administrative dissolution.
Make Everything Official Upfront
Right from the start, ensure that you have your business structure and processes on paper. File an Operating Agreement to get everyone on the same page. This should cover a detailed description of each employee’s salary, dividend payouts, work commitment and any other decision-based question that might arise. The last thing you want is for a future business disagreement to tear your company — and, by extension, your family — apart.
Consider including some additional details in your Operating Agreement to keep the company intact or maintain a certain level of management or ownership. For instance, a transfer restriction can ensure members don’t transfer their company interests outside the family. Likewise, a drag-along rights provision allows majority stakeholders to force a minority stakeholder to participate in any future sale of the company.
Treat Everyone the Same
To that end, your business will inevitably need to employ non-family members. Even if you start out with many family members joining your company, it’s bound to happen. But when it does, you need to ensure every employee receives the same treatment. If family members are handled with more care and consideration than other employees, this will only lead to discord.
Some best practices to follow:
- Set forth a plan for how your company sets salaries.
- Create checks and balances to ensure hiring is fair.
- Offer uniform benefits to all company employees.
- Detail the process for advancement opportunities.
- Only hire family members who actively contribute.
Lock In Employee Agreements Early
Combining the previous two points, you should make sure that all of your LLC’s employees have contracts on file. You never know how the relationship with a given employee might turn on you, even if the worker in question is family.
So, to avoid any potentially damaging conflicts later on in your company’s lifecycle, every employee in your company should have an agreement stipulating their salary, time commitment, exit strategy and any other issue that might be unclear.
Keep Your Personal Life Separate
In case this isn’t clear yet, the goal with your family business is to do everything in your power to keep your personal and business lives separate. That goes for the financial side of things, meaning separate bank accounts and the like. But you should also keep business discussions and concerns out of non-business hours. Blending the two can lead to unrest within your company and make the endeavor feel overwhelming over time.
Consider Your Company’s Legacy
A sole proprietorship begins and ends with an individual. But an LLC allows a business to stand apart from its owners. At this early stage, you might not want to consider such a faraway scenario. Yet, having a plan in place ensures your company will pass on to whomever your business structure declares. If your LLC becomes successful, this continuity of service will be invaluable. A detailed succession plan will keep your family involved and your business intact.
Similarly, a family LLC is often implemented as a tool for estate planning. For families with a significant net worth, structuring these assets under an LLC is especially invaluable, as it can keep ownership within the family. Moreover, it can also often lead to a reduction in overall taxes for the family over the course of many years.
Having a family business can be, in some ways, more challenging than a traditional LLC. But it also offers a unique set of benefits. You’ll be working alongside some of your favorite people. And you’ll be able to celebrate every success and weather every storm with their support. Because you’re all in this together, your LLC will benefit long-term as long as you avoid the most common setbacks that can complicate your goals.
This article was originally published on the Incfile Blog.
Robert Yaniz Jr. has been a professional writer since 2004, including print and online publications. Much of his experience centers on the business world, including work for a major regional business newspaper and a global law firm.