Theory of Relativity: Best Hiring Practices for Family Businesses (Part 1 of 2)

Posting by Geoffrey D. Brown, CPA

By the very term, it is expected that a “family business” always has more than one family member involved in the business.  But just being related doesn’t necessarily make one a good employee of a family business; and all family members are not in fact created equal (except perhaps for identical twins).  How should a family business approach hiring employees in the start-up period and ongoing for the best chance at success?  This two-part posting includes reasons for hiring family (Part 1), then overall strategies for hiring both family and non-family employees (Part 2).

The Case for Family – Why Look Here First?
The reasons to hire from within the family are many and compelling.  Obviously, family members are what make a company a family business.  In centuries past the term “family business” was redundant, as families worked together on the then-plentiful farms, sons worked as trade apprentices for their fathers, and daughters learned the home side of “the business of family” at the feet of their mothers.  Today’s family business is a natural callback to those times past.

For a start-up, your only initial option may be to “hire” family.  The indentured family servant at first can be a salary-saver and a heck of an overtime employee.  A non-family member may simply not be invested enough in the long-term success (and benefits) of the firm to give so much with little to no pay and/or outrageous hours.  These early days of hard work and few profits can really shape the family’s working relationship and help form the long-term vision for the firm while bringing the family closer together.

From another financial standpoint, hiring from within the family can help ease the tax burden by allowing income to be spread over several family members to increase the amount that is taxed at a lower tax bracket.  Family members can qualify for better health insurance plans at better rates, while the total cost of coverage may be written off as a business expense.  Children of a business owner can establish an IRA (or the similar Roth IRA if using the funds before retirement).  A spouse can be hired for child care based on any credit allowed by the IRS, and that too can be deducted as a business expense.

Don’t forget one of the most overlooked needs of the family business – planning for a successor.  In the vast majority of cases, at least for a family business to continue as such, this will be a family member.  And just as each of these family members brings different pros and cons to the table as an employee, the appointment of one (or more) as successor is not something to be solved by “eenie, meenie, minie, moe.”

Preparing Family Members for Entry Into the Business
Before a family member would be considered for hire, or even actual formal interview, consider ensuring all family – whether currently part of the firm or not – are completely aware of expectations for family business employees.  Some children, for example, may want to gear their post-secondary education toward specific degrees or certifications that would most benefit the business.  Maybe you’re looking for new hires to have previous experience in the industry at other firms.  The time to evaluate skills and talents is now, before entering the business.

Do family members believe they will receive higher compensation than non-family peers in identical positions?  This may be the case, but outlining policy clearly may help expectations from turning into disappointments.  Some work expectations of family members may be greater than those for non-family employees – after all, the family member is likely to benefit more from the success of the business in the long run.  Although it may be obvious that this higher level of work ethic and loyalty is expected by family, this isn’t always the case, and some family members simply may not have the desire or ability to work at this level.

So perhaps this post has convinced you to hire family members as all or part of your entire personnel.  How best proceed to select those family and possibly non-family employees?  Stay tuned for Part 2 for recommendations of some tried and true strategies.

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