What is a family-owned business?
A family-owned business describes a business that is owned by at least two members of the same family. Family members can be biological, adopted or related by marriage. These family members may run the business together or share responsibilities with a nonfamily employee or owner.
Coworkers who are family may include married couples, parents and kids, grandparents and grandchildren, siblings, or cousins. It’s important to distinguish between personal and professional relationships while at work.
Here are some examples of family-run businesses:
Walmart is a well-known retail giant that rakes in revenue exceeding $100 billion each quarter. When Walmart founder Sam Walton passed away in 1992, he left the company to his three sons: Jim, John and Rob. As of 2020, the Walton family owns more than 50% of Walmart.
Mark Zuckerberg is often the first name that comes to mind when someone mentions Facebook, but his family is also connected to the company. Zuckerberg owns one-third of Facebook, but he gifted his father 2,000,000 shares as a thank you for providing financial assistance during the company’s launch. Randi, who is Zuckerberg’s older sister, worked on the marketing team at Facebook before pursuing other opportunities.
When it comes to hiring family, Nike’s famous slogan of “just do it” rings true. Phil Knight helped found the company in 1964, but he stepped down from his chairman role in 2016. After Phil left, his son Travis took a spot on the board at Nike.
4. Carnival Corporation
Shari Arison inherited an impressive sum after her father, Carnival Cruise line founder Ted Arison, passed away. The American-Israeli businesswoman is worth more than $4 billion and owns a large portion of Carnival Corporation along with her sister, Micky.
5. Ford Motor Company
Relatives of the late Henry Ford, founder of Ford Motor Company, own nearly half of the company. William Clay Ford Jr., the great-grandson of Ford, accepted a position as the company’s executive chairman in 1999. Henry Ford III, the great-great-grandson of Henry Ford, manages global marketing for the company.
Benefits and risks of hiring family members for your business
It can be comforting to work with a group of familiar faces, but hiring relatives isn’t always a pleasant experience. Compare the benefits and risks of employing family members before you expand your team.
- You can hire employees you know and trust
- Hiring relatives helps create financial security for your family
- You can create a family legacy that lasts for generations
- You can teach children the skills needed to pursue future opportunities with other companies
- In some states, tax breaks are available for parents who hire minor children or spouses
- You may not need to perform background checks on family members, such as spouses or children, if you already know them well
- You may already know the strengths and weaknesses of potential employees
- You may feel obligated to hire family members who aren’t qualified for a position
- It can be difficult to distinguish between personal roles and work roles when you employ family members
- Suspending, laying off or terminating a family member may create tension in your personal life
- Your company may lose profits if you feel obligated to hire or retain relatives who aren’t a good fit
- Nonfamily employees may feel you give relatives special treatment—and these workers might have a valid point
- Family members may feel pressured to carry a heavier workload than other employees, which can eventually cause resentment or burnout
However, there are advantages and drawbacks associated with hiring any employee, related or not. Consider the pros and cons before adding family members to your team, but keep in mind issues are possible with nonfamily workers as well.
How to ensure a fair hiring process as a family-owned business
Numerous issues can pop up regarding the hiring process at a family-run business, especially if you employ a mix of family and nonfamily. Workers or job seekers who aren’t family may feel your company exhibits favoritism toward relatives. They may claim that unqualified family members land positions that require specific skills, or they may assume nonfamily employees have no shot at a promotion.
Alleviate these concerns by implementing a fair hiring process for your family-owned business. Here are some ways you can ensure everyone has a fair shot at securing available positions.
1. Establish required skills or qualifications
Don’t hire someone just because they’re a relative, whether you’re filling a warehouse position or looking for an office manager. Make sure each family member has the requirements needed for your company, such as:
- College education or vocational training
- Previous work experience
- Appropriate personality traits
- Work-related skills, such as typing, spreadsheet creation or data management
- Availability during your company’s business hours
Ideally, you should determine these requirements before hiring for available positions. Once you establish guidelines for employment, make sure you only hire qualified applicants. Don’t bend the rules for a family member unless you’re willing to do the same for every applicant.
2. Enlist hiring help from employees who aren’t relatives
Avoiding favoritism can be difficult, especially if you’re forced to choose between a relative and a nonfamily member for an open position. If you fear you might struggle with impartiality during the hiring process, enlist the help of someone who isn’t a relative. This may be an HR manager, supervisor or cofounder of your company.
There are different ways you can proceed when interviewing family members. You can leave every aspect of the hiring process to a nonfamily member, or the two of you can work as a team. You may find it helpful to perform separate interviews, then compare notes later about whether an applicant is a good fit for your company.
3. Require interviews for all positions
When a position becomes available, don’t immediately ask your husband or kids if they want it. Offer current employees a chance to apply, then advertise the position on job sites or in local newspapers.
Require interviews for all positions at your family-owned business, even if you already believe a family member deserves the spot. You may be surprised by the skills and experience nonfamily members possess when you review cover letters and resumes.
4. Watch for deal breakers during interviews
Many hiring managers have some deal breakers for applicants. For example, you may avoid hiring applicants who arrive late for the interview, chew gum or wear jeans. You may also consider it a red flag if an applicant confesses they don’t have a vehicle or reliable childcare.
Regardless of your company’s deal breakers, make sure they are implemented consistently during the hiring process. If you recently rejected a nonfamily applicant for wearing leggings, it’s not fair to hire a family member who arrives in tattered overalls. If you dislike cell phone usage at work, then you shouldn’t hire a cousin who texts during the interview.
5. Don’t create positions just for relatives
If a family member is struggling financially, it can be tempting to create an unnecessary position for them. However, this can hurt your business in the long run and cut into your profits.
Encourage relatives to apply for available positions, but don’t create positions solely because you feel obligated to help your family.
Rules on hiring family members
All businesses must follow state and federal tax guidelines, but you may face some additional challenges when employing family members. It’s also important to consider other issues your family-owned business might experience when managing relatives, including salary, promotions and successions. Plan ahead so you don’t get blindsided by potential problems in these areas.
Salary and bonuses
Depending on where your company is located, you may have state and federal requirements for wages. This is true regardless of whether you hire relatives or nonfamily members for your company. For example, you may be required to pay at least $12 per hour for employees per state guidelines, or you might have to tax bonuses that exceed a certain amount.
Don’t pay workers under the table, even if your team is made up entirely of relatives. This is considered tax evasion, and committing this type of fraud carries severe penalties ranging from hefty fines to jail time.
Nepotism occurs when a company ignores other skilled employees and promotes a family member instead. This can create major tension in the workplace and even make nonfamily members leave your family-run business.
In fact, some employees may not even apply for leadership positions if they know a relative is interested. They may feel a family member is guaranteed the job and think there’s no chance of nonfamily members advancing in the company. To prevent these issues, family businesses should establish clear guidelines for promotions so all eligible employees have a shot at management and supervisory positions.
Successions shouldn’t be an impulsive decision, nor should they come as a surprise to family members or other employees. Establishing a solid succession plan is important, whether you’re expecting to retire soon or you have decades of work in your future.
Unexpected issues can arise at any time, and you may end up stepping down sooner than planned. Make sure you know exactly what will happen if an injury or ailment impacts your career. Your estate planning should include the financial aspects of any anticipated successions, including taxes and company ownership.
Discussing succession can get heated, especially if multiple members of your family want your spot. You can’t please everyone, but you can minimize disappointment by clearly conveying your expectations and intentions. Consider addressing this topic at a family retreat or dinner with your relatives, and don’t involve nonfamily members during the initial discussion unless you have business plans for them as well.
There are many financial advantages associated with hiring relatives. For example, you may qualify for a tax deduction if you provide medical coverage for your employed spouse or child. You can also pad your Social Security earnings by employing a spouse.
If you’re a sole proprietor, you may qualify for wage exemptions if you hire your spouse or a child under 18. Additionally, you can often skip federal unemployment taxes on a child until their 21st birthday. You can also skip Medicaid and Social Security deductions until your employed child turns 18.
However, these guidelines only apply to family members, not nonfamily employees. Nonfamily members must still have deductions taken for unemployment, Medicaid and Social Security, even if they are under the age of 18. Also, state and federal guidelines for labor and wages still apply for every employee.
Managing a family-owned business can create stability for your loved ones, but it carries some risks. Avoid favoritism when hiring and managing employees at your family-run business, and don’t be afraid to ask for opinions from nonfamily members. Considering multiple perspectives and hiring outside of your family can help your business thrive.