3 Key Considerations When Starting a Family Business

We’re all familiar with the adage that family and business don’t mix. Some of the world’s largest corporations, however, started as a family business or have incorporated their family into the business – think Facebook, Samsung and Volkswagen. We set out three key legal issues you should consider before starting your business.

1. Business Structure

Firstly, what type of business structure will you operate from – a sole trader, partnership, trust or company?

Directionary trusts are relatively common structures for a family business. A discretionary trust allows the trustee to exercise their discretion in distributing the business’ income to beneficiaries. Such a structure is particularly useful if you plan to have children as beneficiaries so they can receive a portion of the business’ revenue. Discretionary trusts distribute taxes by spreading income on lower marginal rates. Further, the trustee can distribute different types of income to the various beneficiaries, lowering the overall amount of tax paid.

A company is also a typical structure, in particular for those who wish to expand their family businesses. It is important to consider your personal liability when deciding on a business structure. For example, unlike a company which is a separate legal entity, partners in a partnership are personally liable to one another for the business’ debts.

2. Employment

One of biggest challenges family businesses can face is hiring family members to work in the business. Good family businesses should have well-drafted employment policies that set out clearly from the beginning the business’ priorities and clearly define the employer-employee relationship. If you are seen to favour a family employee after they have done something wrong, this may start to foster a culture of nepotism that can cause other employees to become resentful. It is sensible if family members have outside work experience at another company before returning to work at the family business.

It is also a good idea for a family business to take on independent employees, directors or advisors to add a degree of professionalism and help ensure business and personal affairs stay separate.

3. Create a Family Code of Conduct

Employees receive employee handbooks and companies may have a company constitution. As such, it can be valuable for your family business to develop a ‘Code of Conduct’. Such a document should guide the overlap between family and business and most importantly include procedures and resolution mechanisms in the event of a potential dispute. Furthermore, the Code should be comprehensive enough to take into account future generations.

Key Takeaways

Your business’ success will heavily depend on separating family and business relationships. Think about which business structure best suits your circumstances and goals for growth. Ensure that all family members have read and signed an employee agreement and where appropriate, implement a Code of Conduct. If you need help setting up your family business, or have any questions about the documents you need to get started, get in touch with our team of experienced business lawyers on 1300 544 755.