Topic overview

Family businesses

Family businesses

Building a family business and passing it on to your children can be enormously rewarding. But family businesses present particular ownership and management challenges.

Planning ahead and involving family members is essential if you are to achieve your objectives, make the most of your family strengths and minimise the risk of disputes or financial loss.

Family business ownership

Retaining family ownership and control is a prime objective for many family businesses, but may limit growth potential. The family-owned business should be open to bringing in outside shareholders if additional investment is needed.

If required, investments can be structured in a way that ensures family control is retained.

Passing the family business on to the next generation can be very challenging and disruptive. From a personal perspective, you will want to ensure that you are treating your children fairly, perhaps splitting ownership between children who are active in the business and those who are not.

At the same time, you need to protect your own interests, say by withdrawing funds from the business to finance your retirement.

Tax efficiency is typically a major concern, particularly in terms of potential inheritance tax liabilities. As with other tax matters, forward planning is essential.

The family-run business

Many family businesses are not just family-owned, but also family-run. Using family members as employees and directors has many advantages, including high levels of commitment, a sense of continuity and shared values, and a long-term perspective.

But equally, family-run businesses can become inward-looking or complacent. Non-family employees may feel that family members receive special treatment. Even where you have brought in outside talent, it can be difficult to retain employees if they are concerned by the family's influence.

Again, the family business faces challenges as control passes to the next generation. Will you be able to stand back from the business, or will you undermine your successor? What happens if none of your children want to run the business - or several of them do? Succession planning is vital.

Family business risks

In the family business, business disputes can quickly become personal - and personal disputes can impact the business. Unforeseen events such as a divorce can have a dramatic impact.

While building a family business can secure the family's financial future, it can also bring an unacceptable degree of risk. This can be particularly acute when personal financial assets are concentrated in the business, or you have given personal guarantees for business debts.

Careful planning allows you to identify potential problems in advance. Options include an appropriate shareholder agreement, clauses in the company's articles of association and the use of a family trust to hold shares.

Above all, open communication can help resolve any issues and allow the business to prosper.

Reviewed by Grant Smith of accountants Armstrong Watson

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