All in the family: 5 things to consider when starting a business with family & friends
Many people aspire to build a business that they can hand down to their children, and lots of entrepreneurs dream of working with their friends. But before you establish your franchise with familiar faces, be sure to do your research and do everything you can to set your new venture up for a great future.
There are 5.5 million family businesses in the United States. According to the U.S. Bureau of the Census, around 90% of American companies are family-owned or controlled. That hardly means the market is saturated, however. Family businesses span a full array of industries, everything from tech firms to film studios. There are companies in just about every field that are owned and operated by friends and family.
Establishing a business with people you care about can offer challenges and advantages. For example, you’ll probably have a built-in supportive environment of trust and communication. However, working with friends and family may make it challenging to create a work-life balance.
In the end, only you, your friends, and your family can determine what’s best for the situation that affects all of you. If you decide to form a business of your own, there are some things you should consider before you start.
Communication is key
Communication is important in a personal relationship, and it's vital in a business partnership. When you go into business with a friend or family member, you might be tempted to take your close bond for granted. If you assume you already know and understand each other, you might not work to be sure you’re on the same page. However, this can lead to trouble down the line. A lack of communication can lead to miscommunication and misunderstandings.
When in doubt, it’s better to overcommunicate. Don’t assume the other person already knows something. It’s better to address something redundant than to have some task forgotten or a critical issue neglected. A benefit of working with your friend or family member should be your bond. Don’t shy away from communicating- early, often, and even about difficult obstacles facing the business.
Know your role
Just as you should communicate clearly, you also want to be sure that everyone in the business knows their role. Everyone should have a distinct position that allows them to showcase their skills and play an important part. While many businesses have an “all hands on deck” mentality when starting out, do your best to start boundaries. Be sure that everyone clearly understands their responsibilities and agrees to them before the business opens.
Similarly, you should know that everyone’s role is the part they play in the business, not outside of it. Clear boundaries on time should be set. This helps maintain healthy relationships inside and outside of the time you spend working together. Find ways to create work-life balance. You should not talk about company issues while on vacation.
| Set boundaries between work and life to prevent burnout and protect your relationships with friends and family.
Have a plan
Having a business plan is a vital first step for your business. You can establish the entity structure and organization for your business. Then you can document the goals and financial projections you have for the products or services you’ll offer. Having these conversations with loved ones who are founding a business with you is important. Getting everything down in writing can also help to ensure you’re all on the same page.
A business plan can also open the door for contingencies for issues that could arise in the future. These documents can provide options if one of you wants to leave the business or if the company fails. You can also draft agreements for other situations or scenarios to be sure you’re all on the same page. If you’d like these decisions to be formal and binding, consider consulting an attorney.
Mix it up
When you can, hire someone who isn’t a friend or family. There’s an advantage to hiring a non-family member or someone without a long personal history with the other owners. This person can bring an outside perspective and break up an established atmosphere that the company may have developed.
Having a non-family member in a leadership position can be especially important. You may need someone with no emotional attachments when it’s time to make difficult decisions. Consider using outside consultants, such as CPAs or lawyers, in a pitch. An outside opinion may be able to break a stalemate if you need an impartial opinion.
Study up on tax rules
Taxes are complicated, but there are some tax advantages to running a family business. A minor child might get some tax breaks. If the parents’ business is a sole proprietorship or partnership, the child won’t have to pay social security, medicare, or FUTA taxes.
Spouses have options for dealing with their taxes as well. An unincorporated business that’s owned by a married couple is typically considered a partnership by the IRS, even if they don’t have a formal partnership agreement. In this arrangement, they will be subject to income, social security, and medicare taxes. However, they are not subject to FUTA taxes.
The Small Business and Work Opportunity Tax Act allows married couples to elect not to be treated as a partnership for federal tax purposes. Instead, they can be classified as a “qualified joint venture,” provided they are the only members of the company. A qualified joint venture must meet all of the following requirements:
- It must be a business jointly owned and operated by a married couple.
- The married couple must be filing jointly.
- Both spouses must participate in the trade or business.
- Both must elect not to be treated as a partner.
Don’t forget deadlines
Even working with the people who are most likely to have your back, important tasks can get lost in the shuffle. Mistakes do happen. Tax is one area of business you want to get right. Missing a payment, passing by a reporting deadline, or forgetting to file a business license can mean fees and penalties. With ComplYant, you, your family, and your friends can focus on your business. You don’t have to worry about taxes. We’ve got you covered.