Magazine Article


Is a Family Business Always a Good Idea?

The subject of family pay is always touchy. Unfortunately, current tax laws favor abuse of family pay. If the company pays a "reasonable" salary to family, it is deductible to the business. The older generation could be tempted to use compensation as a way of shifting assets on a tax-advantaged basis. Don't do it. Pay everyone based on their economic worth to the business, regardless of who they're related to. If you want to gift cash to your kids, that's fine. There are always exceptions. Most times company payrolls are used to transfer wealth or prop up under-earning offspring; this is a disaster in the long run.

How many family members should be in the business? It's a function of how many good people you need-then go get the best people you can find. It's a tough world out there; you can't afford to have people who aren't producing. If they're family, that's great. If they aren't family, that's life! You can't be the employer of last resort for family members, or nobody will have a job.

Business is way too harsh for you to be a welfare agency. Everyone on the payroll must support their own wages. If a relative needs charity and you can support them, tell them to volunteer at a nonprofit and you'll give them $X per week to support their volunteer work (or maybe pay the nonprofit directly for a charitable deduction-ask your tax adviser).

This point is best illustrated by an almost-100-year-old family business that had the bank call their loan. They were hemorrhaging cash and the bank couldn't justify keeping the relationship open. The family had to evaluate how many people were on the payroll and its policy that everyone of the same generation got the same pay. There was a high school dropout getting the same pay as an MBA. One of the third-generation members felt it was important to be home when the kids got home from school; we don't argue with that. However, she got the same pay for 16 hours of work a week that someone else got for 60-plus hours. One family member was always late with her customer orders, causing severe economic damage to the company, but because of who she was, she wasn't held accountable.

Family members must be held to a higher standard than rank-and-file employees. No, that's not fair. Life isn't fair-get over it. Being a family member in a family business means everyone is looking at you, just like the preacher's or politician's kid. You just have to learn to deal with it.

Now that you know some of the pitfalls, you can avoid them and enjoy the celebrations of when a family can work together and build a successful organization based on your family beliefs and values. There's nothing more rewarding than that.

Bill McCurry is a popular industry speaker, writer, and consultant. You can meet him at PMA 08 or reach him at Bill welcomes your comments and questions.