A family corporation definition will tell you it is a business owned exclusively or primarily by family members. In a family corporation, the shareholders are relatives and the stock is largely held by one family. Families choose to establish this type of corporation to vest the business with limited liability or shield their assets from creditors.

How to Establish a Family Corporation

To set up a family corporation, you must file several documents with the state you plan to incorporate in and transfer your assets to the corporation.

Here's a step-by-step outline of the appropriate steps:

  1. Select a name for your family corporation.

    Note: You must include a suffix in your name to indicate your limited liability status.

  2. Visit the secretary of state's website to search their name database.

    Note: You will not be able to use a business name that's already registered in your state.

  3. Appoint directors and various other officers.

    Note: Most states will require you to appoint at least a secretary and a president. Beyond that, most states also require a certain number of directors. In California, for example, family corporations must appoint at least three directors. Be sure to select these appointees wisely. They will be the ones responsible for distributing dividends to your shareholders.

  4. Select a registered agent who will receive official correspondence on behalf of the corporation.

    Note: That person does not have to be an officer of the corporation, but he must reside in the state of incorporation.

  5. Complete the articles of incorporation.

    Note: You may want to hire an online legal document preparation service to help you with this. The articles of incorporation require basic information i.e., name, address, registered agent, names of officers, and the number of authorized shares.

  6. Create corporate bylaws.

    Note: In essence, corporate bylaws are the constitution for your company. They'll outline matters of corporate governance that aren't necessarily mandated by state law.

Important Points for Consideration

When drafting corporate bylaws, it's important to carefully research state law. State law restricts a lot of your content. For example, in some states, directors may not be allowed to dissolve the corporation. Shareholder consent may be required.

Also, you want to name family members as shareholders. Specify how many shares each family member will be entitled to. Do not allow any member to transfer their share to an outside party without unanimous consent from the rest of the shareholders.

In these early stages, address important matters relating to corporate governance. These duties include:

  • Every officer's duty
  • Decisions that will be made by directors
  • Decisions that will be made by shareholders
  • What will constitute a quorum for a meeting
  • How shareholders will transfer shares

Make sure every shareholder signs the bylaws. These do not need to be filed with the state, but they're essential to your business.

At this point, you'll want to open a bank account in the name of your family corporation and deposit funds. As soon as the funds are in the account, they become the property of the corporation property and are not transferable to any shareholders without consent from the board. Those funds cannot be co-mingled with any of the shareholders' personal funds.

Create share certificates for every shareholder. These certificates will display the shareholder's name and indicate how many shares he owns. Indicate any restrictions on the certificate. For example, the shares aren't transferable to any outside parties without the unanimous consent of the shareholders.

Nominating Family Members to the Board

Use your discretion to see if you want to mandate that the business remains in the family. Some companies ask family members to run the business while others simply ask them to serve on the board.

If your corporation ever goes public, it will be up to the board of directors to govern the decision-making. They'll also need to establish bylaws that mandate family members remain on the board in order to retain family control.

Control can also be maintained by limiting the number of shares that become available to nonfamily members. For example, the entire family or even a single family member could retain at least 52% of the shares in order to remain in control of the business and veto motions at the board of director meetings.

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