Did you know that half of the businesses in the U.S. are family-owned? With the increase in new business applications amid the pandemic, starting a family business is a good idea. Why? Every parent’s dream is to build a family business and pass it on to the next generation.
Launching a startup isn’t a walk in the park. There are many considerations to make—from setting your capital outlay to hiring the right people down to marketing your business. However, the legal aspect of your business is one key thing you must not neglect at all.
Here are five legal tips for starting a small family business during the pandemic:
1. Select and form a business structure
When starting a business, you must initially consider your business structure. This structure will affect your business decisions, tax obligations, and business liabilities. The Harvard Review Business determines five typical ownership models of a family business:
- Sole proprietorship: This ownership type is limited to only one person or the couple in the family.
- Partnership: This ownership type consists of more than two members in the family. Not only are the couples the owners of the business, but they may also include siblings or parents.
- Distributed ownership: As the most common family business model, this distributed ownership passes the ownership from one generation to another.
- Nested business: This ownership type is where family members agree to jointly own business assets and some assets separately.
- Public trade: This ownership type is when a portion of the share is publicly traded. In some cases, this business serves as a public company while privately owned by the family.
2. Trademark your business assets
Another critical consideration is to trademark your business itself and its assets. Before you secure your business permit and the license to operate, consider registering the following:
- Entity Name: Your business name must be unique and distinct from other competitors in your industry. This will protect your business at a state level.
- Trademark: Your business logos, icons, designs, and other elements must clearly identify your business and set it apart from the other competitors. Be sure to have them trademarked to protect your business at a federal level.
- Domain name: Your domain name is what recognizes your business in the digital world. This will provide you with the right to claim your business’ web address.
3. Put everything in writing
It’s crucial to draft contracts for various aspects of your business. Know that legal agreements serve as a backbone in the world of business. Whether it’s a contract with a supplier, a third-party vendor, or employees, be sure to put everything in writing. Keep in mind that a verbal agreement is not legally binding. For your reference, here are essential contract types for small businesses:
- Employment contract
- Service contract
- Confidentiality agreements
- Stock purchase agreements
- Rental agreements
- Loan agreements
4. Separate personal and business accounts
When it comes to finances, it’s important to separate your personal and business accounts. Doing so is vital in bookkeeping and accounting. This will help you see the cash flow of your business—the money that comes in and out of your business. Ultimately, this will regulate and maintain the financial health of your business.
Comingling the personal and business accounts of a family business can result in alarming issues. This can lead to some family members taking advantage of the funds for their personal interests. In case of a family feud, business owners will be fighting over their money.
For example, if you and your spouse decide to go part ways, you might have a hard time separating your finances. You might need the help of a divorce attorney to ensure the legal distribution of your financial resources.
5. Don’t forget your tax obligations
Tax is part and parcel of your business. It’s essential to know the tax obligations of your small business. Be sure to comply with your tax responsibilities at all times. Doing so ensures your business avoids legal ramifications, penalties, and even business shutdown.
Keep in mind that working with family members for a family business has some tax implications. Why? Their withheld taxes depend on their job roles, your business structure, and your relationship with them. It’s best to hire a legal expert or a certified public accountant (CPA) to stay on top of your taxes.
Starting a business and growing it over time can be fulfilling and rewarding for the whole family. When it comes to its legal aspects, choose a business structure, put everything in writing, and trademark your business. While at it, separate your personal and business accounts and don’t forget your tax obligations. With all these in place, you’ll put your family business within legal bounds and be able to grow it over time.