Yes, family owned businesses can be a corporation. Founding a corporation involves establishing an independent legal entity that exists apart from those who own, control and manage it. If the shareholders or owners die, the corporation doesn’t dissolve because it is considered an entirely separate entity.
Also note that Corporations have the ability to transact business, pay taxes and enter into contracts, while allowing owners to limit their personal liability. There are two basic types: An S – Corporation and a C – Corporation.
C corporations are legal entities separate from the owners. Owners (and shareholder), therefore, have a substantial amount of protection of personal liability and those operating the corporation are employees. These family members in the business are also employees and may also be shareholders. The C Corp structure is popular if the business wants to sell stock to raise money for business growth.
As a separate entity from the owner or owners, a corporation files its own tax return (IRS Form 1120). The advantages include being able to claim deductions for business expenses and a flat corporate rate of 21 percent put into effect with the 2017 Tax Cuts and Jobs Act. The disadvantage is the “double taxation” factor where the company is not only taxed on its profits but then the owners are taxed again when their wages are taxed on personal income taxes.
Meanwhile, the S Corp is a special election which allows owners/members to pass business income, losses, deductions, and credits through to their member shareholders for federal tax purposes. Shareholders of S Corps are then required to report the income and losses on their personal tax returns.
Note that most family – owned businesses in the United States choose to elect S Corp status because of the treatment of employment taxes. Only wages are subject to self – employment taxes and other business profits can be distributed as dividends, which are only subject to income tax, but no payroll taxes are required. To elect S Corp status, the business must file IRS Form 2553 and meet ongoing filing requirements.
Incorporating a business always involves filing Articles of Incorporation with the state. The corporation bylaws also dictates how the company deals with divorces, deaths, succession and whether or not the company must stay in the family or can be sold to an outside party.
Also, since the corporation can also sell shares, there are expected to be rules on what happens to the shares in case of death, divorce, or company buy – out. Note that some family businesses may decide to have some family members run the business and others serve on the board.
However, if the family corporation goes public, the board of directors governs decision – making. By creating bylaws mandating only family members can be on the board, a family can retain better control. Families can also decide to limit the number of shares going to non – family members.
Factors to Consider When Incorporating a Family Business
As corporate family businesses grow, it can sometimes be impossible to run the business using only family members, and publicly traded corporations can remove significant control from the family members who founded the business. There are wide varieties of structures and factors to consider when making this decision. They include:
1. Majority Shareholder
One well known way for families to ensure that the family retains ownership – even if the corporation goes public – is to limit the number of shares available to non – family members. For instance, the family itself or a single family member might retain 52 percent of the corporate shares, thus giving the family broad control over the business and a veto vote at board of directors meetings.
2. Control of Board of Directors
Irrespective of whether a corporation is public or private, family – owned businesses can make sure that the family exerts significant control over the board of directors. Note that some family companies in the United States require that the board consist primarily of family members. Others require that at least one family member sit on the board or require the board to deliver regular reports to the family.
3. Bylaws and Articles of Incorporation
Note that for a private corporation, the articles of incorporation and bylaws convey key information about the ownership structure. In the United States, some corporations mandate that the business stay within the family, while others more or less nominate only family members to serve on the board or run the business.
However, once the corporation goes public, your board of directors will govern decision – making, and establishing bylaws mandating that family members must comprise all or a portion of your board can help you retain family control.
4. Owner – Operator
Also have it in mind that smaller family – owned corporations use an owner – operator model. A store owner might serve as its manager and hire his children, siblings or spouse to fill various roles within the business. However, with this model, the family retains ownership while ensuring significant control over the business’s daily operations and management.
It’s not a shock that problems can arise when you’re working with the ones you love. It can be tough to draw the line between professional and personal relationships, and that can seriously impact your family dynamic. In spite of this difficulty, some family businesses have implemented formal structures to make for greater stability. Nevertheless, for many family businesses it continues being difficult to define the role of these structures or simply, how to improve its efficiency.