9 Questions for Family Business Owners

Tax and business planning is important for the success of any organization, but especially for the family-owned enterprise. Here are some important questions that owners of family businesses need to address.

1. Do you have a plan?

Most family businesses fail to write a business plan. A formal plan that includes both short and long-range goals should be written and updated regularly.

Include specific goals such as profit, growth and market-share targets. Plans for conflict resolution and transition should also be included.

Without a plan, your business has no direction and possibly no future. You can be sure your strong competitors have written plans.

2. Who's running the store - family, outsiders, your employees?

When several family members participate in the company, an organization chart should be drawn to clearly show lines of authority. Promotions should be based on a clear, fully understood set of guidelines.

Compensation issues often lead to disputes. A formal compensation formula may be tied to industry norms. The compensation structure should be understood by all family members.

A board of directors or advisory board may be appointed. The board should include non-family members to provide beneficial objectivity.

3. Should the legal form of the organization be changed?

Whether your business is a sole proprietorship, a partnership, a regular corporation, an S corporation or a limited liability company, you should review your business form periodically to see if it is still the best choice for your business. The legal form under which you operate can make a difference in the taxes you pay, the costs of doing business, and the amount of paperwork and red tape you'll have.

4. Have you reviewed your retirement and fringe benefit plans?

The types of plans available depend on your business form. Besides being an excellent tax planning tool, such plans can be effective in motivating and retaining employees.

5. Are formalities observed?

Family members occasionally overlook the fact that business assets are not personal assets. Company loans to family members need to be documented. Shareholder or employee use of corporate assets such as automobiles may have income tax consequences. Get advice so you structure transactions properly.

6. How many employees do you really have?

The IRS and many states are cracking down on businesses that treat employees as independent contractors. The results of a payroll audit can be very expensive in terms of additional taxes, interest and penalties.

7. Have you complied with all tax reporting requirements?

You should have an accounting system which ensures the timely filing of payroll, excise, and income tax reports.

8. Do you consider the tax consequences of transactions beforehand?

A little planning can often save many tax dollars. Seemingly straightforward transactions, such as selling or trading assets, can be tax traps.

9. Who's next in line?

Many family businesses are lucky enough to have a very strong member at the helm. Unfortunately, that person won't live forever.

The survival of any family business depends on how wisely one generation passes ownership to the next. The more family members, the more complex the situation is likely to become.

Generally, putting too many people in charge is a bad idea. They can't agree on management decisions. Transferring management of the company to one family member over another can cause tremendous animosity within the family. Many such cases have ended up in a courtroom battle.

If you want to keep your business in the family, select a successor while you're still active in the business. Once you have chosen a successor, get him or her involved in the day-to-day activities of the business. Gradually turn over more responsibilities. It's a golden opportunity to evaluate your successor's performance and to provide assistance.

Entice key personnel to stay on with incentive programs. Performance bonuses, stock options or an equity stake may guarantee that talented employees will become permanent.

When deciding when and how to transfer your business, consider the implication of estate taxes. The IRS's share, with today's high estate tax rates, could fatally weaken the business's cash flow.

Facts show that only 30% of family-owned businesses survive to the second generation, and only 13% survive to a third generation. Careful planning while you're still at the helm may prevent the demise of your business.

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