A family business is a wonderful way to build security and wealth for generations to come.
When it comes to your family business, there are a few important steps to take before finalizing the business — here’s an overview of best practices. Consult with a reputable legal expert to ensure that your family is up to speed on business law basics.
Already have a family business that you are ready to pass along? Check out this blog about passing on the family business.
Basic Business Law: Starting a Family Business
When starting a family business there are some basic steps you need to cover when it comes to business law and your family. Here are some key legal requirements you can’t miss:
- Choose an appropriate business structure. Your business structure should be chosen based on your business plan and approach, as well as other factors which include taxation, licensing, and potential growth. For more information, check out this blog about how to choose your business legal structure.
- Choose a name. The name you choose could be connected to your family name and legacy for decades to come, so choose wisely.
- Choose a registered agent and register your business. You can have the founder or director be a registered agent, or pay an external registered agent to fulfill this role if you would like a higher level of anonymity in the future. Your lawyer may serve as your registered agent. There are several steps to registering a business, and what steps you take will depend on your industry and state. Consult with your attorney and accountant to ensure that this step is done correctly.
- Establish a hiring plan. Who you hire for your family business — and when you do this — could impact your overall success greatly. Make sure that your hiring procedures are in compliance with federal and state laws, and consider consulting with an HR professional.
- Registration, permits, and licensing. Insurance, permits, and licensing are all important elements that you must communicate to family and colleagues from the getgo. Do not skip these details at the outset, or leave them out of your business plan, as this could put you in hot water later on. You must have federal and state identification numbers.
There’s a lot to be said when it comes to building a family business — and plenty more to do at the front end to make sure that you comply with the law. Make sure you
Create Business Agreements
Depending on what business structure you have chosen, you can then move forward by drafting the appropriate agreements. If you have a corporation you will need documents like articles of incorporation. Operating agreements may be in place with any type of structure. Business law agreements are extremely important at the outset. It is only after the agreements are put into place that you can register your business.
Open a Family Business Bank Account
Open a business bank account with a trusted financial institution when starting a business, and make sure that the right people have access to it. Most banks have special business packages. When you go, be sure to ring your ownership agreements, business license, and EIN (or SSN). Family members involved in the business should have access to necessary accounts.
Establish a Succession Plan
No matter what type of family business you have, or even what phase it’s in, you must have a succession plan in place, and update it regularly. Your succession plan should include important information about the business structure and planning, as well as who takes over in the event of your retirement or death. It can also outline preferred ways to acknowledge conflict or legal disputes. It’s better to have a thorough succession plan set up at the outset than face family conflict later on when an unexpected event comes up. This can bring you and your family peace of mind.
Another important reason to have a plan in place is that today’s generations aren’t as likely to take over the family business right away. They are more likely o sell, scale, or make major changes to the business.
Family business owners should take stock of how invested their family is likely to be in the business, in both the short and long term. There is some level of risk evaluation in this step as well.
A succession plan may include details related to:
- Retirement planning
- Intellectual property
- Contracts
- Managing taxes and licensing
- Financial planning
- Ownership transfer
- Strategic planning and management
- Costs
- Company growth
- Estate planning and inheritance
- Succession with non-family members
- Insurance
- Operations and marketing
The key here is to start considering who will take over in the future (yes, even the long-term future) when the time comes, and who you want to do what, if the business is passed down (as opposed to being sold). Fostering familiarity and understanding as early as possible will leave you more peace of mind when you retire. Being transparent about your plans and intentions at the very start of your business will help to foster loyalty and trust to family and non-family members alike.
Hire a Legal Expert to Protect Your Family Business
When it comes to your family business, boundaries and rules must be put in place at the outset. Family businesses can offer excellent opportunities to future generations, but only if they’re managed properly. The decisions you make today could impact your family for years to come — with good or bad results. Hiring a legal expert can help ensure continuity and protect everyone from disastrous errors.
Need a lawyer for your family business? Call 303-780-7333 or schedule an appointment for a free consultation.
