Common Pitfalls When Running a Family Business

Own or operating a business with your family? Over half of the businesses currently operating in the United States are family businesses. While the term family business is used loosely, most would agree it is some business with a combination of multiple family members involved as the owners, managers, and employees. These can vary from what you are likely envisioning such as the mom-and-pop shop to large corporations.

Mixing Personal & Business Finances

One of the earliest difficulties family businesses face is they often begin as casual ventures or side projects. Because of this, families rarely look into creating the formal legal entity needed prior to conducting business. There are a multitude of reasons to avoid operating a family business without a formal legal structure. The family’s and businesses’ finances would be commingled likely sharing a bank account. A family business needs to maintain separate bank accounts and accounting practices for family and business use.

Consider the likely scenario of family members continually chipping in cash to run the family business. Well, should your business then be sued or one family member can no longer pay his or her personal or business debts, this would likely expose all family members to share in the liabilities, personal or otherwise. Without the formal legal entity shielding family businesses, everyone could easily wind-up bankrupt if even something relatively minor goes wrong.

Create a Formal Legal Structure

So how does my family business avoid these mistakes? Many family businesses operate as a limited liability company or LLC. Similar to a corporation but without many of the mandatory corporate formalities to abide by. The LLC is an ideal choice as it is easy to create and provides personal liability protections should the business be sued or unable to pay its debts as described above. An LLC is also what is known as a “pass-through entity”, which means any profits from the family business “pass through” to the individual owners, so the LLC does not have to pay a separate tax on profits.

Although an LLC is a common and practical entity for family businesses, it may still not be the most suitable option for some families. Some family businesses are better suited to be structured as a corporation or may be able to operate as a simple partnership.

Consider Succession Planning

Another point of contention in a family business is consider what is the likely scenario of your family business should you pass away. This is obviously a difficult scenario to think about, but not having a formal legal entity in place will likely leave the family business without a succession plan. However, if a legal entity such as an LLC is created you or any other family member may be allowed to leave an ownership interest to your children or other loved ones in your will. This leaves allows the family business to continuing operating as usual without interruption.

Final Thought

And above all else when operating a family business is to separate family and business time. Going into business with your family can wreak havoc on those relationships, but finding time to separate the two can make both incredibly fulfilling and rewarding for your family.

If you are forming a family business or own a family business, we recommend that you consult with a business attorney to ensure you are complying with Iowa law and maximizing your family’s liability protections.