You’d generally assume that starting a family business is easier than doing it alone. In many ways, that’s true—a family member can offer vital emotional support, bring an element of trust and loyalty to your joint venture, and share your personal values.
However, a considerable potential challenge is conflict, which can often intensify between relatives. If this happens, you risk hurting the business and your relationship with family members.
But don’t let that discourage you. If you make a clear plan, define your goals, and support each other, being part of a family business can be incredibly rewarding. Keep reading to find out our top tips for success.
1. Incorporate your family business
One of the first decisions you’ll need to make when starting a family business is which legal structure is right for you. We recommend a private company limited by shares, the UK’s most popular type of trading company.
This is an incorporated business structure in which every owner (called a shareholder) is responsible for the company’s debts up to the amount they have paid (or agreed to pay) for their shares. This is known as limited liability. In other words, multiple owners share the financial risk and protect their personal assets.
In general terms, limited companies are considered family-run businesses if the business owner or their family members have at least 25% of voting rights in the company. So, you’ll need to allocate shares accordingly when registering the family business under this legal structure.
Unlike unincorporated businesses (i.e. sole traders or traditional partnerships), a limited company is a separate legal entity, meaning it exists independently of its owners. This is particularly beneficial for succession, making it easier to pass down when you’re ready for future generations to inherit the family business (we’ll look at succession in more detail later in this blog).
Incorporating a family business as a limited company offers additional benefits, such as tax efficiency, credibility, and flexible profit distribution.
2. Allocate roles and responsibilities
A major advantage of starting a family business is flexibility. Having a personal relationship with your business partner(s) makes it easier to share roles and responsibilities and generally help each other out.
However, if unmanaged, this can confuse who does what and who is accountable for oversights. It may be a tricky conversation, but allocating roles and responsibilities when starting a family business is essential.
In the case of a limited company, you should discuss who wants to be a shareholder, a director, or both. Each of these positions holds different roles within the company.
For example, shareholders are the owners of the company, investing in it financially in the company, and voting on certain big decisions. The directors, meanwhile, run the company on a day-to-day basis and are responsible for ensuring it complies with the law.
What about a company secretary? The law doesn’t require a private limited company to have one, but it’s beneficial to have one if someone is qualified for this role.
Then you will have to consider other more standard jobs within the company, such as those in customer service, social media management, and supplier relations. You’ll need to share these roles between you before the company expands and takes on more employees.
If you’re unsure how to split these functions, it helps to assess each person’s soft skills, personal qualities, and professional experience, as one person could be better suited than the other. This way, everyone plays to their strengths, and you’ll maintain fairness and control of the family business.
3. Determine how you’ll manage disputes
Disputes are common, especially if it’s a family business. As much as you trust each other now, relationships can break down for any number of reasons.
Only you and your relatives know how your relationship works. Before starting a family business, evaluate the strengths and weaknesses, where problems could arise, and how you plan to fix them. It is also strongly recommended to plan formally for dispute resolutions, should they ever arise. Below are some of the ways you could do this.
Create a shareholders’ agreement
If there are multiple shareholders in the family business, creating a shareholders’ agreement is useful. This legally binding contract supplements the articles of association and helps protect shareholder relationships, their rights, and the company. It can also specify procedures for resolving feuds and deadlocks if/when they arise.
Review your articles of association regularly
Most limited companies in the UK adopt model (default) articles of association. They provide a basic scope of directors’ duties, shareholders’ decision-making powers, and how to manage conflicts of interest.
However, the model articles are pretty limited. Therefore, you should review and update your articles where needed to ensure that the family business remains adequately managed over time and to make provisions should a dispute arise.
Assign a mediator
A mediator is a third party that aims to settle family disputes if you’re unable to. As an impartial advisor, a mediator’s role is to find a suitable resolution that benefits all those involved. This method helps minimise stress and disruption to the family business during conflict.
4. Define and commit to a shared purpose
Did you know that family businesses with clear goals and values tend to perform better than those without?
According to PwC’s Global Family Business survey, which polled over 2,000 worldwide family businesses, 73% of companies that experienced double-digit growth between 2022 and 2023 were those with a clear set of family values and an agreed business purpose. Those that were particularly successful had a strong environmental, social, and governance (ESG) strategy.
When starting a family business, you should define a commercial purpose that’s meaningful to everyone, including your descendants, who will take over one day. For example, you could focus on attracting and retaining top talent, creating a diverse board of directors, or strengthening customer trust.
Or perhaps you’re passionate about sustainability or new technologies. Focus on your motivation to start a family business and work together toward a common goal to achieve success.
5. Create a clear succession plan
You’re probably thinking of starting a family business for several reasons. One of those is likely to pass it down the family tree.
To do this successfully, though, and to ensure the family business survives, you need to create a clear succession plan from the get-go and equip the next generation with the right skills, knowledge, and interest for when you’re ready to step down.
Below are a few strategies that could make the transition smoother.
Communicate clearly
Communication is key to succession planning. Don’t let your future successors speculate about your plans for the family business when you retire or are no longer around. Instead, be clear and transparent about your succession plans—when do you plan to stop working, and who do you want to pass the company on to?
Your circumstances and plans might change over time, so remember to be open about them and what they could mean for the next generation.
Encourage interest
For succession to work in a family business, those who will inherit it need to want to take over. That fundamental desire is necessary for the company to be managed properly and succeed long-term.
Therefore, to inspire and excite your descendants about running the family business one day, you should encourage a genuine interest from an early age. This could be as simple as using positive language around them when you talk about the family business.
They should feel pride, satisfaction, and optimism about potentially becoming business owners. In contrast, they probably won’t want to get involved if you constantly say that running a family business is stressful and complex. But remember to paint an accurate picture and avoid misleading them.
Educate the next generation
Your future successors need to understand what it means to own and run a company. Educating and supporting them on that journey will set them up for success and give you the peace of mind that you’re leaving the family business in good hands.
There is no right or wrong way to do this, and it depends on their age. For instance, if they’re teenagers, you could start with basic financial education—things like budgeting and how credit cards work. If they’re older, you could teach them about directors’ duties, preparing accounts, and understanding share structures. You should also advise them on:
- Responsibility
- Leadership skills
- Entrepreneurial spirit
- Emotional intelligence
- Crisis management
If it’s your child or grandchild, teaching them the ropes through internships, work experience, and shadowing is also a good idea. This will give them first-hand experience of the role and start building their confidence to step into your shoes.
6. Understand inheritance tax rules
To transition the family business efficiently, you and your beneficiaries need to understand the implications of inheritance tax (IHT). IHT is currently 40%, but it doesn’t apply to:
- An estate (including company shares) value of less than £325,000, or
- Assets above £325,000 that are left to a spouse, civil partner, charity, or community amateur sports club
If your children (including adopted, foster, or stepchildren) are the beneficiaries, the threshold could increase to £500,000.
In the case of a private limited company, shares over the tax-free threshold will be subject to IHT. However, there are reliefs and exemptions, such as ‘taper relief’ (if shares are gifted under certain circumstances). There’s also Business Relief, which provides up to 100% tax relief on private limited company shares under certain qualifying conditions.
IHT is a complicated area, but it’s crucial to understand what it could mean for your family business. You can find more information on thresholds, rules, and allowances on the HMRC website or speak to a trained tax advisor.
7. Hire non-family members
Heritage and legacy are undoubtedly the essence of a family business, but remember to hire non-family members, too. It’s natural to want to keep things ‘in the family’, but what if there are no suitable candidates for the roles you need to fill? Or what if a relative doesn’t wish to work for the family business?
External hires will significantly improve the company’s growth prospects and help avoid nepotism. They can also:
- Bridge gaps between generations
- Connect you with valuable contacts and networks
- Bring new ideas to the table
- Fill a skills gap
- Offer a fresh, impartial perspective
You should stay open-minded about hiring external people. When you do, it’s equally important to ensure that they mirror your values and ethics to maintain the family spirit.
8. Make a backup plan
Finally, you need a backup plan. When starting a family business, the last thing you want to think about is something going wrong, but it’s essential to identify potential challenges and how you’ll navigate them to ensure the business thrives. Think about:
- What if your intended successors don’t want to take over the family business? Who will take their place? Will that affect the IHT implications?
- If you plan to have multiple successors, what if there is rivalry between them (i.e. siblings)?
- How might running the business impact your family dynamic? How will you separate your personal relationships from professional ones?
- How will you achieve a healthy work/life balance?
- How will you maintain a firm structure in the family business?
- How will you separate family tradition from innovation to help the business grow?
Most of all, what if the company fails? If multiple owners exist, will one buy each other out, or will you sell the business? Or will you seek another solution? These are the vital questions you should answer before starting a family business to prepare you for the journey ahead.
Summary
All businesses involve risk, but a family business has much more at stake. Conflict can intensify between family members, and it can be tricky to separate personal relationships from professional duties.
However, with proper planning and contingencies, starting a family business can be exciting, fulfilling, and rewarding.
Thanks for the article! These family business tips provided me with some insights for my own tax planning UK business.
Thank you for your recent comment!
We are extremely pleased you found these tips insightful.
Kind regards,
The QCF Team