Family and the Business

How do you plan to finance your business startup? If you are like most new business
owners, you will draw on personal and family savings to pay the startup expenses and
keep the business going until the cash starts to flow in. Although this is a very reasonable and common approach, it will affect your family’s normal activities. In
most cases, this will mean your family having less, rather than more money available, at least for a while. Obviously, it is important to prepare your family for this eventuality and plan accordingly. Your new business will consume more than just money: It will also absorb as much time and energy as you are prepared to devote to it.

Family Money Becomes a Business Asset

Business ventures, like all human endeavours, give rise to numerous clichés. From the business perspective, “it takes money to make money” is particularly annoying because it is so true. Certainly the primary purpose of a business is to generate
revenue. Just as certainly, you must spend money to generate this revenue.
Virtually all owners spend their own, or their family’s, money to start their businesses. Personal or family funds that are allocated for business purposes are
obviously not available for family use until the business is profitable enough to return the owner’s initial startup investment. With fewer funds available for the family, it may be necessary to make a lifestyle change.

Family Members as Employees

When business owners look for help, they frequently look first to members of their own family. This approach yields several benefits. It keeps money in the family. The owner can transfer money to family members and claim the transfer as a deduction for income tax purposes. Further, these related employees can probably be available for as much or as little time as required. Unfortunately, relatives do not always make the best employees. They may lack the requisite skills and interest to perform required tasks.

Obviously, profits that are shared among family members, rather than among nonfamily owners, will yield more income to the family. Family members might also be better at keeping secrets and maintaining confidentiality than nonfamily employees.
It is often difficult for business owners to share control with others. Fiercely independent, they sometimes find it difficult to share or delegate responsibility for making things happen and for keeping things going. In family businesses, with control shared among family members, owners do not really feel that they are giving up control.

Don’t assume that just because you are very excited about your business that your family will share this excitement. Before counting on family members’ participation in the business, make sure that they are genuinely interested and can make valuable
contributions.

Also, when family members work together, there is a tendency for domestic issues to
spill over into the work situation and vice versa. One of the good things about working away from home is that it helps separate home and family. If, for example, you have a dispute with your spouse or partner over something as trivial as leaving the top off the toothpaste tube, a day apart will help both of you forget about the issue. On the other hand, if you spend the day together working, the normal pressures of running a business can help escalate a nonissue into a disagreement. Ordinarily minor work annoyances, can ignite into a major conflict that
would otherwise have been ignored and forgotten. Domestic differences and business
problems can be a very toxic combination.

Divide and Manage

The challenges faced by family businesses go beyond the ownership and operating challenges that face all small businesses. They also go beyond the difficulty of balancing work and family, an issue that anyone who works and also has family responsibilities must face. Family businesses represent the merging and integration of three kinds of critical issues: ownership, operation, and family. To make a family business work, and indeed succeed, family members must consider and resolve these issues.

Ownership Issues

➤ Who actually owns the business?
➤ If ownership is shared, what is the interest of each owner? How is this interest
determined? How is it valued?
➤ How was the ownership interest acquired? Was there an actual contribution of
money? Was the ownership interest a gift? What tax issues arise as a result of making a gift of an ownership interest?
➤ Who has ultimate decision-making authority? What happens if joint owners cannot
reach an agreement?
➤ What restrictions apply in dealing with the owners’ interests? Can they sell their
interests or pledge them as security for loans?
➤ What happens to the owners’ interests in the event of a marriage breakup? What
buy-sell provisions apply?
➤ How will ownership interests be transferred to other family members? When can
these interests be transferred? Will they be transferred on death or on disability?
How will the interest be valued?
➤ How will the owners share the profits? If bonuses will be paid, how will they be calculated and when will they be paid?