Key Takeaways

  • A family corporation is a business owned and often operated by members of the same family, offering limited liability and estate planning benefits.
  • Families may maintain control of the business through majority share ownership or by keeping leadership roles within the family.
  • Corporate formalities—such as holding annual meetings and maintaining records—are essential to preserve liability protection.
  • Family corporations offer tax advantages and succession planning tools, including the ability to gift shares over time.
  • Proper legal structuring, including buy-sell agreements and employment policies, helps prevent internal disputes.

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.

Benefits of Forming a Family Corporation

Family corporations offer a range of advantages, especially for those looking to keep wealth and decision-making power within the family. Some key benefits include:

  • Asset Protection: Like other corporations, a family corporation provides limited liability protection, shielding personal assets from business liabilities.
  • Tax Advantages: Family members can be employed by the business, and income shifting strategies may reduce the overall tax burden. Additionally, shares can be transferred as gifts to lower estate and gift tax obligations.
  • Succession Planning: Shares can be transferred gradually across generations, allowing a smooth transition of control and preserving family legacy.
  • Unified Vision and Governance: Family-run corporations often benefit from a shared long-term vision, which can lead to stable leadership and cohesive decision-making.
  • Estate Planning Tool: Family corporations are often used in estate planning strategies to consolidate ownership, reduce estate taxes, and avoid probate.

How to Form a Family Corporation

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

  • Choose a business name
  • Appoint directors and officers
  • Appoint a registered agent
  • File the articles of incorporation
  • Draft corporate bylaws
  • Open a business bank account

Maintaining Control in a Family Corporation

To preserve family control over the corporation, it’s essential to:

  • Ensure Majority Ownership: Maintain at least 51% of voting shares within the family to control major decisions.
  • Define Share Classes Strategically: Consider using multiple classes of stock—such as non-voting and voting shares—to distribute financial interest while keeping control centralized.
  • Create a Family Governance Structure: Establish a family council or advisory board that includes members involved in the business and others who may be stakeholders.

These structures help avoid conflicts and ensure that key decisions reflect the family’s values and objectives.

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.

Observe Corporate Formalities to Preserve Legal Protections

Even in a closely held family corporation, observing corporate formalities is crucial to preserve limited liability protections. Key requirements include:

  • Holding Annual Shareholder and Director Meetings: Document decisions with formal minutes.
  • Keeping Financial Records Separate: Avoid commingling personal and business funds.
  • Issuing Stock Certificates: Maintain accurate share ledgers and ownership records.
  • Following Bylaws and Articles of Incorporation: Any changes to operations should be formally approved and recorded.
  • Obtaining Necessary Business Licenses: Even family-run corporations must remain compliant with local, state, and federal regulations.

Failure to observe these formalities may allow creditors to pierce the corporate veil and hold shareholders personally liable.

Common Challenges in Family Corporations

While family corporations can foster strong collaboration, they may also face unique internal risks:

  • Conflicts Over Leadership and Roles: Disputes may arise over who holds key positions or how decisions are made.
  • Succession Disputes: Lack of clear succession planning can lead to uncertainty or legal conflict when older generations retire or pass away.
  • Nepotism vs. Meritocracy: Balancing familial loyalty with business performance can be challenging when hiring or promoting family members.
  • Generational Divides: Different values or visions for the company can emerge across generations.

To avoid these issues, families should implement clear employment policies, conduct regular performance reviews, and consider neutral advisors or directors.

Legal Tools for Structuring a Family Corporation

Strategic legal planning is key to the long-term success of a family corporation. Useful legal tools include:

  • Buy-Sell Agreements: These govern how shares are transferred in the event of death, divorce, or departure of a family member.
  • Shareholder Agreements: Set expectations for ownership rights, voting procedures, and dispute resolution.
  • Employment Agreements: Clearly define the roles, responsibilities, and compensation of family members employed by the corporation.
  • Trust Structures: Placing shares in trust can protect assets, streamline succession, and centralize control.

Consulting with a qualified business attorney can help tailor these tools to your family’s goals.

Frequently Asked Questions

  1. What is the main purpose of a family corporation?
    A family corporation allows relatives to own and manage a business together while receiving limited liability, tax advantages, and estate planning benefits.
  2. Can non-family members be part of a family corporation?
    Yes, but families often retain control by owning a majority of shares or restricting board seats to family members.
  3. Do family corporations pay different taxes than other corporations?
    No, but they can leverage tax planning strategies like income shifting and gifting shares to lower overall tax exposure.
  4. How can conflicts be avoided in a family corporation?
    By implementing clear governance policies, employment standards, and legal agreements like buy-sell and shareholder agreements.
  5. Can a family corporation go public?
    Yes, but doing so often involves relinquishing some family control depending on how much equity is sold to outside investors.

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