A family corporation is a corporation that is formed by family members. It is formed in the same way as any corporation would be formed. The only difference is that the shareholders (owners) of the company are all relatives. There are a few reasons as to why a family might choose to form a corporation, including a desire to operate a business with the purpose of obtaining a profit, a desire to protect assets of individual family owners from creditors, or a desire to provide the family business with limited liability protection.

Examples of Family Corporations

There are a few different ways in which families work together in a corporation. For example, a parent might form a business and hire only his children, nieces, and nephews as employees to help oversee the business.

Even if the family corporation offers shares to the public, so long as a family member holds 52% or more of the shares, the family will retain control over the business. Whether the corporation is private or public, such businesses can allow families total and complete control over the board of directors. Some family corporations might even require that the board consist only of family members.

How to Form a Family Corporation

In order to form a family corporation, you will need to follow the below steps:

Choose a Name

You will have to choose a business name for your company; when choosing a name, you will have to use the corporation business identifier in your name, i.e. Corp., Corporation, Inc., Incorporated. Before you choose your name, you should conduct a business entity search on the Secretary of State’s website in the state where you plan on forming your family corporation. There are other requirements that you must abide by when choosing a business name. For example, certain terms are prohibited, such as University, School, Trust, Bank, Insurance, and other terminology. You can find out what other requirements there are by visiting the Secretary of State’s office.

Appoint Directors and Officers

Most states require that you appoint at least one director and a secretary. You might be required to appoint additional officers and directors, depending on the state where you choose to incorporate. For example, California requires that you have 3 directors. If you want to remain as a family corporation, you should choose only family members. However, some family corporations will appoint outside directors and officers, but choose to have one family member who can ensure consistency during such director and officer meetings.

Appoint a Registered Agent

You will need to appoint a registered agent who will receive legal papers on behalf of your family corporation. The agent can be one of the officers or directors, so long as that individual is a resident in the state where the corporation is being formed. However, you can also choose to hire a third party agent.

File the Articles of Incorporation

Next, you will need to file the articles of incorporation. This document will require the following information:

  • Business name
  • Principal office
  • Registered agent name/address
  • Purpose
  • Names/addresses of all directors and authorized
  • If any shares will be sold, i.e. how many shares, classes of stock, etc.

Draft the Corporate Bylaws

After you have filed the articles of incorporation, you will need to draft the corporate bylaws. This document will outline how certain business decisions will be made, including voting rights, how many shares each shareholder is entitled to, director and officer duties and roles in the company, how lending should be handled, and so on. The shareholder’s names and percentage of shares should also be identified in the bylaws.

Open a Bank Account

After you’ve finished completing the bylaws, you will want to open a business bank account. Before this, however, you will need to obtain an Employer Identification Number (EIN). You can do so by visiting the Internal Revenue Service (IRS) website and requesting an EIN. Thereafter, you will open a bank account using the EIN number provided to you. It is important that corporations, along with other businesses, separate the personal and business profits and expenses so not to risk potential personal liability for the corporation’s obligations and debt.

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