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Are You Considering Starting A Business With A Family Member? Watch Out For These Potential Pitfalls

Are You Considering Starting A Business With A Family Member? Watch Out For These Potential Pitfalls


Starting a business with family can be incredibly beneficial for you and your family members. However, specific risks should be considered carefully before starting a business with family.


According to the Harvard Business Review, a staggering 70% of family businesses either fail or are sold off before the second generation takes over. Below, we will examine some of the potential pitfalls of starting a family business and how to avoid them.


Potential Risks of Starting a Family Business


There are many pros to starting a family business. You (hopefully) can depend on your employees and partners because they are family members who have a shared history and relationships forged outside of the business. You likely know each person’s character and work ethic because you have spent considerable time around them. You might also be able to get your business off the ground faster since you will not have to worry about vetting and hiring candidates. There may also be less financial pressure because you know and trust the people you work with.


However, there are some noteworthy risks. Disputes that arise due to the business can more easily impact your family life because your work life and personal life are not entirely separate. Nepotism could potentially affect your business’ ability to innovate if you only hire relatives rather than bring in talented outsiders. Determining the line of succession if you pass away can quickly become contentious, especially if a clear plan has not been implemented.


Working with family members can also make it more difficult for leaders to make tough decisions. For example, if a particular family member is not cut out for the work they are tasked with, the business owner may find it difficult to let them go due to their family connection. Employing a family member who is not qualified for their job duties can be detrimental to the company’s growth. Still, owners may be reluctant to bring in outsiders who could do the job more efficiently.


Tips for Starting a Family Business


If you are planning to start a family business, consider following these tips to avoid some of the pitfalls that family-owned and operated companies often face.


  • Create a business plan – Every family business owner should create a company plan. The plan should be in writing, and anyone who has a stake in the business should have a copy.


  • The plan should outline each family member’s role and who they report to, how each employee is paid, the family employees’ ownership stakes, and the process for exiting the business. You should also consider who you want to pass the company on to in the event of your death and draft a succession plan. I have a lot of problems with this because a “business plan” is not a legal document. Although, everyone should have a business plan… What you are describing here sounds more like an employee manual. The part about deciding what happens when you die would be covered by a combination of business documents and a Will.


  • Consult with an Attorney – Every family business owner should consult with an experienced business attorney about their company plan. An experienced business attorney will provide advice on the various business entity types available to protect from unforeseen liability, unanticipated tax consequences, and more. Depending on the entity type recommended by the attorney, the attorney can also draft operating agreements, by-laws, and other necessary documents. While anyone can set up a business entity through the State Corporation Commission’s website, a seasoned attorney will ensure that you have the necessary supporting documents in place should something unfortunate happen and allow you to make an informed decision about which type of entity is best based on their knowledge, experience, and a clear understanding of your goals.


  • Enact a set of rules – Every family business must lay some ground rules to ensure success. One of the most important rules every family business should abide by is keeping family life and work-life separate. You should also insist that teens get some outside experience working another job before they are permitted to work for the family business full time. Real-world work experience will make them more valuable employees. Everyone who works at the company should be treated the same, regardless of how you are related to them. And you should consider hiring some outsiders because qualified individuals outside the family might bring a fresh perspective to your business.

Virginia Business Lawyers

If you are thinking about starting a business with a family member, contact the Virginia business lawyers at Taylor, Taylor, & Taylor, Inc. today to discuss your situation and get started on your business plan.

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