4 Musts Before Starting a Family Business

family business legal

Here’s four often overlooked legal issues you should think about before starting a family business.


Starting a business can be an exciting and optimistic period in an entrepreneur’s life.

However, what most small business owners do not realize is the decisions made at the beginning of a business’ life often have the largest impact down the road such as if/when having to face litigation. Therefore, it is important to place a strong emphasis at the business planning stage.

Here are four important considerations that one should think about when starting a family business:.

1.   Family Financing

Most often, start-ups seek family members as the first investors for a business.

Because of the familial relationship, a family member who invests normally does not ask to see financial projections or require the investment be contractually sound. Now, while this may seem like a wonderful scenario for both sides (family member helping out and someone receiving funding with little question), the investment can be harmful for both parties in the long-term if planning is not considered.

In the case of the family investor, he/she may be receiving less than they bargained for.

In the case of the entrepreneur, he/she may feel imposed by the family member because of the family member’s investment by the family getting involved in the business in a way the entrepreneur did not anticipate or, worse, the possibility future litigation by the family member if they feel as though the business and/or arrangement is not going the way the family had hoped.

Furthermore, there could tax consequences if not handled correctly.

For instance, an investment by a family member is to be structured as a loan but subsequently categorized as an equity investment by the IRS due to the familial relationship. The equity investment determination thereby disallows the use of large deductions such as the interest expense deduction.

The determination could also affect the rights of family as a creditor in case the business fails to perform.

2.   Employing Family Members

Finding the right employees is essential to the success of any business.

Of course, hiring family members can make it a tricky predicament. Family members have a tendency to believe they can act as they see fit.  Employing persons that think they are outside the rules, or exempt from the ordinary responsibilities of an employee is a detriment to any business.

Every business owner that hires family members needs to make sure there is a set list of job responsibilities, and a defined hierarchical structure, ideally in a contract.

The fact a governing document is in existence furthers the position that there is a separation between work and family. By giving the family member the boundaries of the relationship, it is less likely that the family member will thwart the development of the business.
Next page- Family business considerations #3 and #4 and Conclusion


FTC Bans Non-compete Clauses

FTC Bans Non-compete Clauses

Here are six FTC non-compete provisions In a previously article on non-competes entitled “Are Non-Compete Provisions Still Enforceable”, there was a reference to a rule published for comment in January 2023 by the U.S. Federal Trade Commission. The proposed rule would...

Seven Lessons Before Entering into a Bad Agreement

Seven Lessons Before Entering into a Bad Agreement

Look before you leap, do your home work before the commitment Jose, the President of Software Development Group (“SDG”), was desperate to expand his business. He saw many opportunities of exploiting the market for products to enhance the data security of medical...

Video Gallery

Johanna Godinez Latin Biz Today partner, International Yoga Day: Celebrating Unity and Wellness on June 21st
Modern version of Stoic philosopher Epictetus
A professional leads a cybersecurity training session for employees, emphasizing best practices. The photography captures the engagement of participants, showcasing the educational aspect of safeguard
Hispanic bearded male businessman trainer teaching coaching new recruitment African American female businesswoman employee in formal suit sitting studying learning company graph chart strategy
The presence of a robot using a computer. Office keyboard being typed on by machine. future IT group,.
Latino Streetwear Entrepreneur Latin Biz Today
Chef Lorena Garcia cooking with a wok
Latina Chef Loren Garcia


Which item currently represents the greatest hurdle in the growth of your business?(Required)

Sign Up for the Latin Biz Today Newsletter

PR Newswire

Featured Authors

avatar for Guillermo Taboada MartinezGuillermo Taboada Martinez

Guillermo Taboada Martinez has more tha...

Digital Trends Can Boost Happiness

Innovation & Strategy


Four Basic Principles for Raising Capital

Four Basic Principles for Raising Capital

Outside investors want to understand a business' strategy as well as its financial statements.   The need to raise capital from outside investors requires a great deal of preparation across multiple dimensions. Among many things, investors look to understand...









Work & Life


Health & Fitness

Travel & Destinations

Personal Blogs

Pin It on Pinterest