Young family walks through business.
Almost half of all companies in the U.S. are family businesses. It's important to learn more about typical structures for your family company. — Getty Images/Drazen Zigic

Companies where multiple employees, owners or managers are members of the same family are quite common. It’s estimated that more than half of all companies in the U.S. are family businesses. Just as there are many variations on what it means to be a family, there are many ways to structure a family business. Here are a few things to think about if you’re establishing a business with your relatives.

Know your ownership options

Most family businesses are structured in five models of ownership.

  • Owner/operator: In this model, ownership control is limited to one person or couple. A good example is the British monarchy, where the crown passes to the sovereign’s firstborn. There needs to be a clear succession plan in place for maintaining this ownership model.
  • Partnership: In this model, only leaders in the business can be owners and benefit financially from the company. This prevents family members who do not contribute to the company’s profits from benefiting from others’ hard work.
  • Distributed: This is the most common ownership model. Distributed family-owned businesses pass ownership down to most or all descendants, whether or not they work in the company.
  • Nested: This structure consists of parts of the family agreeing to own some assets jointly and some assets separately. It’s called “nested” because smaller family ownership groups sit inside larger ones. For instance, the Jones family could own the company, but only certain family members own the rights to the company’s IP.
  • Public: In this model, a portion of the shares are publicly traded or the business acts as a public company while remaining privately held by the family.

There’s no one ownership model that’s right for every family business, but these decisions are important to make at the beginning of the venture.

Find the right entity

Ownership is just one piece of the business structure. You will also need to set up a formal legal entity, such as a corporation or LLC. While it may be tempting to skip this step, formalizing your business is important, perhaps more so when working with relatives.

“Drawing up a legal document like a Partnership Agreement or Operating Agreement will force everyone to deal with sticky matters upfront,” writes one expert in Entrepreneur. Likewise, establishing a business entity protects individuals from the business, in case something goes wrong. Should the business be sued or have to declare bankruptcy, there’s legal protection for the family and individual owners.

An LLC is a great option for family businesses. LLCs offer liability protection without many of the administrative requirements of a corporation.

[Read more: Getting Ready to Launch? How to Choose the Right Business Structure]

While working on your overall structure, keep taxes in mind. Your tax burden may impact who in your family assumes certain roles.

Set up good governance

Many family-owned businesses set up a system of governance where family members can weigh in on business decisions in a formal and structured way. These governance systems can be as informal as a family assembly or family council, or as official as a board of directors or shareholder council.

“Large and durable family businesses tend to have strong governance. Members of these families avoid the principal–agent issue by participating actively in the work of company boards, where they monitor performance diligently and draw on deep industry knowledge gained through a long history,” McKinsey research found.

The purpose of a governance system is to provide clarity on the roles, rights and responsibilities of all family members, as well as to regulate any business discussions and disputes that may arise before they impact the business. Your governance system will likely be decided based on the ownership model you choose.

[Read more: A Guide to Creating a Board of Directors]

Get some advice on taxes

There are certain ways hiring and working with your family members may impact your taxes, especially if you’re working with immediate family. “The taxes you withhold and report are slightly different depending on the role they play, how your business is organized, and your relationship with them,” reads TaxSlayer. “For example, hiring your husband or wife will alter your tax responsibilities; hiring your second cousin will not.”

As you work through your ownership model and business structure, keep your tax burden in mind. Taxes may impact who in your family assumes certain roles. Speak to a lawyer or a CPA as you structure your family business to learn more.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published August 06, 2020