Family businesses account for about 30% of all small businesses according to the 2009 census data. Owning and operating a family business poses unique challenges for everyone involved. Each unique relationship poses a new set of concerns. For this post, we’ll focus on parents working with adult children, assuming the parent(s) runs the business.
Sibling squabbles will likely come up at some point. It may seem obvious, but preferential behavior can creep in easily. One of the most common scenarios occurs when a parent who founded the business gives an adult child with talent or commitment that tangibly benefits the business more responsibility, and possibly more money. This can cause grumbling, which leaves other siblings increasingly sensitive to favoritism. When the rewards become more automatic and less performance based (when you spend less time thinking about them), what should be a minor problem (but a problem nonetheless) turns into a scuffle.
When you have more than one child who wants to be involved in the business, treating all children equitably can be a struggle. Even when you treat everyone fairly, problems can still arise. Alternative compensation structures are certainly worth discussing. However, be certain that you keep titles accurate, and do not use them to placate disgruntled family members, since the IRS uses titles as one way to determine if pay is equitable in case of an audit. If you decide a family member works less or is a less integral part of the team, his or her title should reflect that.
Many people often automatically put any family members down as employees. However, it can be worthwhile to examine whether they are independent contractors. Not only can this reduce payroll taxes, but it also works well for children who are not controlled by the family business, but still want to be a part of it. As the IRS has stated in its definition of the independent contractor, the payer can only control the result of the work–not the process of getting there. For family members who want to be involved in the business, but not micromanaged, working as an independent contractor can work. As always, it is absolutely imperative to be honest when classifying workers.
In addition, parent-child tension can arise when a child wants a bigger role in the business. As the founder of your business, it’s understandable to have some reluctance to hand over the reigns. Oftentimes, children begin showing an interest in taking over the business at times that aren’t financially feasible, or before they themselves are ready. Creating an exit plan with a clear timeline can help ease the transition, and can help break the news to adult children who aren’t ready to take over.
Succession planning is the parent’s responsibility. Talk to the board, get things in writing–if you don’t have a succession plan yet, then you are behind schedule. As you begin to contemplate leaving the business, it’s important to reevaluate to make sure your original plan is still feasible–what seemed reasonable last year may not be so reasonable now.
Finally, how can you respond when adult children do not have an interest in the family business? As hard as it may be, you may need to put aside your own plans. Although there have been cases where initially reluctant children ended up with a fulfilling career in the family business, trying to persuade children to join the business rarely ends well for either party. Generally, it is best to let the disinterested ones go.
For parents running a family business, dealing with sibling squabbles and parent-child tension can be difficult to manage. However, these issues are not only manageable, but also common to many family-owned businesses.
This posting is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this posting should not be acted upon without specific professional guidance. Please call us if you have questions.