How to start a small business as a family

Starting a small family business may seem simple, but if you don't follow some basic business rules you can risk family relationships.
You have a great idea. Your uncle thinks it is a great idea and wants to help you market the idea. Your cousin, Ida, is a whiz at accounting and offers to handle the books. Before you know it you have a family run small business up and running. Before you take those first steps, however, you need to make sure you follow some key rules for starting a family business.

First, develop a business plan to go with your great idea. The purpose of a business plan is to lay out the goal of your business, the unique product or service you will provide and your plan for achieving your goals. The plan should also include everything you can think of about the business including potential start-up costs, costs of service, when you think you will start to see a return on investment and other financial expenditures you might have to make. The plan should also outline personnel needs for your new venture.



Outlining your personnel from staff to CEO is the second essential rule for starting a small family business. A staffing plan allows you to clearly identify the roles and responsibilities for each member of your business. This will be essential when there are key business decisions to be made. While the idea of developing a family business may seem appealing, unclear roles and responsibilities can serve to rip a family apart during essential decision-making moments. If making decisions will be a shared responsibility then your plan should outline how disputes will be handled.


The third rule to follow when starting a small family business is to outline the role, payback and power that any investors, such as wealthy Aunt Ida, will play in the company. This should explicitly state whether the funds are an investment that indicates partial ownership in the company or whether the money is a loan. If the cash infusion was an investment, under what circumstances will you make a dividend payment to the family investor? So investors get a vote when critical decisions need to be made? If the funds were a personal loan, what payback or interest schedule will you use? If the funds were a gift with no expectations, that should still be outlined in writing.

By this time you may be thinking that this sounds much more like a corporation than a small family business. If so, you have discovered the fourth rule for starting up your venture. Set up your family business as either a corporation or a limited liability company (LLC). By incorporating you are actually preserving the individual members of your family. By going through the simple process of incorporation, you are limiting personal liability for your company. That means that if the business doesn’t fare well that what family members would be liable to creditors for is minimized. If you merely have a partnership, each member is responsible personally for any debt or burden the company takes on.

Following these four simple rules when you start a small family business will help preserve family fortunes and relationships. While working with those family members you truly admire and enjoy being around may seem like a great idea, the downfall of the great idea can also mean the downfall of the unprepared clan. Take some time up front to develop your plans and agreements and your business and your family will prosper.