A family business can be a great asset that provides steady and dependable income for your family, especially in a time when other jobs are scarce. However, going into it with a poor understanding of the legal aspects of running the business could cause a big problems for you and your family down the road.
There are a few common oversights that family businesses tend to make. If you suspect you may have done some of these things, you should meet with your lawyer as soon as possible to rectify the situation before it turns ugly.
You should never allow your business finances to get mixed up in your personal finances. Though many family businesses start out as small, under the table operations, they can quickly become something more serious. At this point, it is recommended that you register your business as a limited liability company (LLC) or a corporation. This protects all the family members involved from being sued or going bankrupt in the event of a legal crisis.
Most small businesses opt to register as an LLC rather than a corporation. It protects you from personal financial liability, but saves you from tedious processes like holding meetings and establishing a board of directors. Also, an LLC allows for easier planning and prevents you from having to pay separate taxes on the profits you make.
In addition to a corporation or LLC, you can register for a ‘doing business as’ or DBA status. All this is is a fancy method of showing that your business is separate from the legal entity who owns it. You may have a difficult time acquiring a business checking account at a bank if you don’t have a DBA status. Having this status can also make it easier to file suits against consumers and wholesalers for nonpayment or other grievances.
The Importance of Employment Agreements
While it may feel uncomfortable discussing business rules, regulations and arrangements with your family, it is essential to making sure things run smoothly. Each family member who will be working for the business needs to put their demands on the table regarding things like pay, severance, operations and what to do should the business go under. Furthermore, it’s important to get these things in writing. If something goes wrong with the business legally, this can save everyone a lot of trouble.
No Business License
For most businesses, even ones from home, you may be required to possess a license. The type and number of licenses you need will depend on your business type and location, as well as if customers will be allowed on the premises. A business license is usually only a small yearly fee. If you’re unsure of what you need and where to start, your local city hall will be able to get you set up with the necessary information and paperwork. Improper or insufficient licensure can cost you a lot in fines, harm your reputation and even shut down your business.
Next in Command
Nobody wants to discuss who would take over the business if something were to happen to you. In fact, as many as three-quarters of small businesses admit that they have named no successor. This is one of the most important decisions you can make regarding your family business.
It’s tough to talk about, but it is a vital consideration to the business’ future that someone is there to oversee things temporarily or permanently. In certain fields like law or medicine, try to find another professional willing to purchase the business from you. Take the time to show them how you run things and get them familiar with the finances, suppliers, website and other aspects of the business. Make your choice known to your family members, as well as in your will.
It’s important to keep in mind that by failing to make your business into a legal entity such as a DBA, corporation or LLC, your business ceases to exist when you do. However, setting things up correctly from the start can keep your business in the family for generations.