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What are the Different Structures of Family Business?
A family business is owned, managed and operated by multiple family members. There are numerous companies where owners and managers belong to the same family. Just like there are many ways to understand what it feels like to be a family, there are plenty of ways to structure a family business.
Family businesses contribute a lot to a country's economy. If you are considering starting a family business, you must choose a proper structure to get started. In this following article, we will have a detailed discussion about the structure of a family business that will help you choose the perfect one for your company.
What are the Structures for Starting a Family Business?
Choosing a structure creates an internal framework for the business. It defines the members' roles and activities to reach a business's objectives. It should also help people achieve their own goals and career.
There are five basic ownership structures followed in a family business:
1. Owner-Operator
This is one of the simplest family business structures. In this ownership structure, a single person or a couple controls the company, which can be passed on through the next generations.2. Partnership
This is another structure that works well for many family businesses. In this kind of business structure, only the leaders of a company can be owners and earn financial benefits from it. This model works very well during a company's start-up phase.
There are three types of business partnerships:
- General
- Limited Liability
- Limited.
3. Distributed
If you want your family business' ownership to be passed on to the descendants, you can choose the distributed structure. To avoid conflicts of partnership, many business owners consider this structure. It works for most family businesses because the owners want the next generations to inherit equally.4. Nested
In this family business structure, business owners own some assets jointly and other assets independently. This structure works well when there are conflicts or differences of preferences in decision-making among its owners. This structure is ideal for keeping the branches from any tension and sticking to the family.5. Public
A portion of the company's shares is listed and publicly traded in this type of business structure. It can also act like a public company even though it is privately held and controlled by family members. These family business organisational structures work well when the owners cannot actively contribute to the company or do not want to make decisions.What is the Three-Circle Model for Family Business?
The three-circle model is accepted worldwide as the standard model for operating a family business successfully. In a three-circle model, the first circle refers to 'ownership', the second circle stands for 'family', and the third circle refers to 'business. These are the main components of a business, which forms the pillar of every family business.
The family business of any of the structures operates its system following the three-circle model as explained below:
- Family Owners: This type includes the family members who own a part of the family business but do not engage in business operations.
- Family Owner- Employees: As the name suggests, this type of ownership includes the family members who own the business and work as employees in the company. These types of owners usually work as managing directors.
- Non-Family Non-Manager Owners: These owners are usually outsiders who invested in the company but do not work for it.
- Non-Family Owners Employees: This kind of owner works for the family business but is not a part of the family. They own a certain portion of the company's share capital.
- Family Members: This group consists of all the family members who often work for the company but do not own any part of the business' share capital.
- Family Employees: In this category, all family members work for the company without owning any part of the business' share capital.
- Non-Family Employees: This includes general employees who work for the company in exchange for salaries and are not family members. They also do not own any share of the business.
Why Structures Work for Running a Family Business?
To manage a family business strategically, the owners should choose a structure wisely. If there is difficulty in understanding the ownership options, it can affect an entire company causing it to lose its competitive power. The family business structure works because it ensures proper division of tasks, control over performing those tasks, coordination of efforts among members and a systematic flow of information.
To accomplish these objectives, the owners must decide the positions to be filled and the authority, responsibility and duty attached to each person. The best-suited structure of a business ensures that there are:
- Clear responsibilities, roles and expectations of shareholders
- Smooth ownership transition
- Less conflict between family members
- Effective, focused board of directors
Which Structure Works Well for Running a Family Business?
There is no specific structure that works well for all family businesses. Most family businesses adopt one of the above five structures. You have to decide which model to adopt. Nonetheless, LLC (Limited Liability Company) is an attractive choice for family businesses. It is one of the variations of the partnership structure.
LLCs are usually passed through entities; every business owner enjoys liability and requires minimal formalities. Investors consider this beneficial because of the liability protections. Additionally, LLC offers excellent flexibility when it comes to succession. The next generation can enjoy ownership over time with the full benefits of liability protection.
A family business is one of the oldest economic systems that contribute to a country's Gross National Product or GNP, total employment and total export. In the initial days of a business, it is an ordinary venture. But over time, when the family members and the next generation start participating in the business, it becomes a proper family business. To ensure proper coordination of efforts, tasks, and transparent roles, you have to choose a family business structure that suits your company best.
FAQs about Structure of Family Business
What is the role of a CEO in a family business?
How to start a family business?
Is a family business a sole proprietorship?
My brother and I run a small business. If something happens to one of us, what happens to the business?
Can life insurance help divide the business among heirs in case of death?
Other Important Articles Related to Financial Planning For Family
Important Articles About Financial Planing
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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