It's Friday again, folks! Thanks for joining me here in the Community. I read an article earlier from
uschamber.com that outlined different family owned business structures. This topic was interesting as there are so many family owned businesses, around 50% of American companies alone. While this large percentage of businesses are owned and operator by families, I've never read, seen, or even really heard of the different types of structures these businesses can take on. Here's a little about what I learned...
Ownership Options
- Owner/Operator: Ownership and control of the company is limited to one person or just a couple of people. The article compares this example to the British monarchy, where the crown is passed down to the firstborn. "There needs to be a clear succession plan in place for maintaining this ownership model."
- Partnership: With a partnership model, only leaders within the company can be owners and benefit financially. "This prevents family members who do not contribute to the company’s profits from benefiting from others’ hard work."
- Distributed: A distributed structure is the most common ownership model. Ownership of the business is passed down to almost all of the family descendants, whether or not they work within the company.
- Nested: This option has this name because smaller family ownership groups are "nested" inside larger ones. "This structure consists of parts of the family agreeing to own some assets jointly and some assets separately."
- Public: This model represents a business where part of the shares are traded publicly and not solely among family members.
The Right Entity
An ownership model is just one piece of the family business structure. Once the model has been chosen, leadership will also need decide on a legal entity for the business, like a corporation or LLC. "Establishing a business entity protects individuals from the business, in case something goes wrong. Should the business be sued or have to declare bankruptcy, there’s legal protection for the family and individual owners."
Good Governance
The next part of the family business structure is the leadership ladder. A governance system would need to be set in place for family members to weigh-in on business decisions in a professional manner. "The purpose of a governance system is to provide clarity on the roles, rights and responsibilities of all family members, as well as to regulate any business discussions and disputes that may arise before they impact the business. Your governance system will likely be decided based on the ownership model you choose."
Tax Advice
This was an eye-opening point for me! As mentioned, "Hiring your husband or wife will alter your tax responsibilities; hiring your second cousin will not.” I didn't even think about that but it's definitely something to be mindful of. It's always a good idea to speak with a lawyer or CPA regarding your taxes for any business, especially when hiring immediate family members.
As always, you're welcome to ask these kinds of questions here in the Community too! There are so many members here who may even run their family business who I'm sure would be glad to lend a hand. What's your biggest piece of advice for family owned and operated companies? I'd love to hear from you!
