Bringing Children into the Family Business

For many business owners, working with a child in the family business and then planning for the child to take over the family business is a lifelong dream. However, this dream may put blinders on the owner in making the right decisions about what is best for the child and best for the business. Many owners forget to ask themselves if the child is genuinely committed to working for the family business and if transferring control of the family business to a child rather than to loyal and experienced employees is really what is best for the business. This article will address some of the important factors to consider when evaluating a succession plan that involves an owner's child for a family business.

Early years

You can encourage your child to learn about the value of work and start saving by creating opportunities for your teenage child to work in the family business. The value of early opportunities to work in the family business are: 1) exposure to the business itself and the business you have created as the owner, 2) the opportunity to earn income for work to help pay for college and other expenses, and 3) the opportunity to set aside earnings in a custodial IRA until the child turns 18.

If you provide a positive and enriching work environment, it may increase the chances that a child may want to be a part of the family business when they are older. Conversely, the experience may confirm to your child that she is not interested in working for the family business.

The opportunity to earn income as a result of work is a valuable lesson for a teen and may teach her the value of planning—setting aside earnings for expenses and perhaps opening a custodial IRA account. 


As the child's parent, you may contribute an agreed upon amount of the child's earnings to a custodial IRA account if the child is younger than 18. Most custodial IRAs are Roth IRAs and allow the child to grow these assets over many years. Consult with your independent tax advisor about opening a custodial IRA.

Early adult

Once the children become adults, the question becomes when to bring them into the business. Should the kids go to college first. Or maybe after a stint with a company outside of family control. There have been successes and failures with each of these scenarios. The answer depends on the child, their maturity level, and their interest in the family business. The most important thing is to ask them. Have open discussions with your children to find out their personal goals.

It is hard, but it is also important not to give your kids a job just because they need a job. As a business owner it is important to put the business and the business' stakeholder first. A disgruntled owner's child can have a negative impact on employee morale. It may be better to give them money until they can get back on their feet rather than let them poison employee morale.

The best fit

Once the decision has been made for the child to work in the business, it is important to find the right position. Have a plan for their onboarding. Often it is a good idea to have them work in all the departments for a set period. They should be treated as any other new employee. The other employees are watching their every move. It is important for them to be on time or early and follow the instructions from their supervisor.

Assigning a mentor that is not a member of the family will help the child and the owner. The child gets an important member of the team to guide them, and the owner gets valuable feedback. It is important for the child to be punctual, listen and take direction from their supervisors. They don't want to be labeled as "the owners kid."

During this process it is vitally important for the owner and the child to have an open highway of communication. Ideally the child needs to know what is expected of him/her and is given the feedback from the mentor. The owner should also get an inside track inside his department. The child can give valuable feedback on processes in the department – what is working and what needs some adjustment.

Outside experience

Requiring the child to work outside the family company prior to employment with the family company can be a valuable strategy for several reasons: 


  1. Confirmation of the desire to work in the family business. After success at another company, returning to the family business shows commitment.
  2. Gaining business insights. Working outside of the family business may help the child bring new concepts and strategies back to the family and they may develop new skills that could help the family business.
  3. Self-confidence. Experiencing success outside the family helps the child build a self-worth that she may not find only working for her parents.

Conclusion

Business owners face many challenges when trying to bring a child into the family business. If the child doesn't want to be there, the owner risks souring the business culture. It’s a good idea to expose the child to good experiences at the business when they are young. If the end goal is for the child to one day take over the business, it is important for the owner to find out the strengths and weakness of the child through a plan to expose the child to all aspects of the business and to ensure they are suited to a leadership role. Be ready with a Plan B if the child is not owner material or not interested in the business.

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The information contained herein is current as of August 1, 2024. The views expressed are those of the guest author and are subject to change based on tax and other laws. 

This material is for informational and educational purposes only and does not constitute investment advice, tax, legal, accounting or estate planning advice

The planning, tax and asset protection strategies mentioned here may not be suitable or tax efficient for you. You should review the strategies discussed with your legal counsel, independent tax advisor and accountant/CPA prior to making any decisions. 

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