At CCHA, we are committed to helping you achieve your business goals. We’ve previously discussed how to start an online business, buy a franchise and create an LLC, among other business topics and issues. Today, CCHA is here with four tips for starting a family business in 2021.

Determine and establish a formal business structure and proper corporate governance

What may have started as a casual chat between you and family should transition fairly quickly into a more serious discussion on things like business structure and ownership options. It is crucial to establish a formal business structure and governance process before your business matures, so as to best mitigate the potential for disagreements that can arise during the early stages of business.

It’s important to understand and consider all business structure options, so as to make the best collective decision for your business, yourself and your family. Business structure has a significant influence on legal rights and obligations, both on an individual and business level, as well as within your family structure. For example, if you go the way of incorporating your business, you’ll need to put certain corporate governance practices in place, including holding regular meetings with a board of directors, as well as filing financial statements by strict deadlines, and other requirements.

If you have decided to incorporate as a company, you’ll need to have a Shareholders’ Agreement (often referred to as “Bylaws”) or Operating Agreement in place, depending on the specific structure chosen. This document is one that regulates relationships between shareholders of a company and how the business and its affairs are run. Such a document helps mitigate risk by setting rules for decision-making, dispute resolution between shareholders, and exiting the business.

Create a succession plan

Transitioning a business from one generation is no easy feat. As such, it’s important to discuss transition plans well before the time comes to pass the business on. Though certainly not a strictly-legal consideration, common advice is to establish roles based on ability rather than age or lineage. Maintaining a business with this approach will likely improve performance and help maintain balanced, amicable relationships between family and non-family employees.

While this is not a purely legal consideration, the advice that is often given is to put people into roles based on ability rather than lineage. Running the business with a meritocratic approach is likely to improve performance and help maintain balanced relationships between family members and non-family member employees.

Establish business roles and responsibilities

You’ve heard the expression “too many cooks in the kitchen” — it’s the age-old cautionary tale, warning against having too many people trying to control, influence, or work on something, so much that the quality of the final product suffers as a result. It’s an especially easy outcome to achieve where family business is concerned, unless and until roles and responsibilities are determined and agreed upon. As such, CCHA recommends identifying and documenting roles and responsibilities early on in the creation of a family business.

Make it official and keep it official

Although you’ll be working with family, it’s important to keep business matters organized. CCHA recommends documenting everything, including any employment contracts stipulating details such as compensation, duties, expectations, and anything else an employee needs to know about their new role. Writing things down and making formal agreements makes it less likely you’ll have a disagreement later on and usually provides the resolution to the disagreement if one occurs. Document other matters such as changes in compensation, any and all human resource issues, etc, so that if and when new employees join the team, everyone can be on the same page as one another.

Contact CCHA for any family business challenges or issues

The Business Services Practice Group at CCHA is here and available to help you bring your business to life. For more information or for assistance in developing a strategy for your family business or existing business, or to discuss other issues related to your business operations, please contact us.