Family-owned businesses and the ownership of business and personal assets by family members are subjects which are often overlooked and misunderstood by many entrepreneurs.

When a person starts a business, either alone or with non-family business partners, there is a greater awareness of exactly who owns what, the rights of the owners, and contingency plans for selling or closing the business. There are additional issues faced by business owners who are looking to include their siblings, spouses, or children into the business. The issues include: how to transition family members into the business, establishing a management structure that includes family input, and implementing a succession plan that provides for future ownership of the business.

The first issue deals with how to transition in new family members and hold them accountable for their performance. These are relevant issues for all employees but even more so for family members. It’s critical that incoming siblings or children go through the same hiring procedures, be given specific job responsibilities (preferably documented), and be held accountable for their performance in the same manner as all other employees. If possible, allow family members to prove their worth by starting at the bottom and working their way up. Also, ensure that they report to the same manager or supervisor as the other employees in like positions, and that they go through the same “employee review” process with equal scrutiny and reward. This approach will help eliminate a sense of nepotism”and favoritism and protect the company from claims of reverse discrimination.

Second, once a family member becomes involved in the daily operations of the business, it’s a good idea to give them limited powers and authority as a manager with specific checks and balances to ensure that they can handle the responsibilities and do so without creating a “Napoleon complex.” Generally, this means updating the company’s operating agreement, if it is a limited liability company, or the by-laws, if it is a corporation, to reflect those powers, authorities and limitations. Again, having a family employee’s powers and authorities checked by a non-family member is a good thing, since their performance should be measured objectively and changes to their responsibilities can occur without mom or dad being the bad guy.

Another key consideration is when and how to sell or gift the ownership of the business. This means either gifting or selling the interests for fair market value over a period of time or all at once. There are many variations in gifting and selling ownership, each with specific management and tax consequences. The strategy for conveyance depends on the financial goals of the owners and needs of the business. It also depends on who the incoming family members are, what their current functions/responsibilities are and what their long-term goals are. Although beyond this discussion, careful tax planning needs to be addressed to ensure that the proper mix of short and long-term solutions.

Last, create performance metrics for the overall performance of the business before family members come aboard. Make sure that these indicators reflect their presence, either positively or negatively, and that there is a management strategy in place to make sure those targeted metrics can be obtained. This will hopefully give them a true sense of contribution and being part of the team, which will lead to the success and growth of the business. After all, motivation and enthusiasm will go a long way in preparing any employee for the future.

If you have any questions or want to post any comments please do so at the blog or feel free to contact me directly at jcarter@insyghtlegal.com