Family businesses play a crucial role in Australia’s economy, constituting approximately 70% of all businesses. From agricultural enterprises to cafes and construction companies, many local ventures are family-run. Operating a family business can be deeply fulfilling, allowing you to create a legacy while working alongside loved ones. However, it also presents unique challenges, as personal feelings can intertwine with business decisions, particularly when family gatherings double as board meetings. This article provides essential legal, accounting, tax, and strategic advice to help small to medium-sized family businesses thrive.
Choosing the Appropriate Business Structure
One of the initial steps is selecting the right business structure. Common choices include sole trader, partnership, company, and family trust. Each option has distinct implications for liability, taxation, and control:
|
Structure |
Features for Family Business |
|
Sole trader |
A single owner has complete control and a simple setup but faces unlimited personal liability. |
|
Partnership |
Shared control among two or more owners. Not a separate entity; partners have personal liability, and the business can dissolve if one partner exits. |
|
Company (Pty Ltd) |
A separate legal entity offering limited liability for family shareholders. Formal governance (directors, etc.) and shares facilitate succession. Profits are taxed at a lower rate of 25% if classified as a small company. |
|
Family trust |
A discretionary trust (operated by a trustee) that runs the business for family beneficiaries. It allows flexible income distribution for tax purposes and can shield assets from personal liabilities. Establishment requires a trust deed and proper administration. |
Consulting an accountant or lawyer when selecting a structure is advisable, as this decision will impact taxes, legal responsibilities, and the involvement of family members. For instance, a discretionary trust can facilitate income splitting efficiently among relatives, whereas a company structure can ease ownership transfer to the next generation through shares.
Example: A husband-and-wife duo running a café may begin as a simple partnership, but as their business flourishes, they might choose to incorporate as a company for limited liability. They could also establish a family trust to manage the company shares, allowing income to be distributed among themselves and their adult children working at the café. By correctly setting up their structure and keeping family and business matters distinct, this family can enjoy the advantages of collaborating while safeguarding their assets. While each family business will navigate its unique path, careful planning and open dialogue can lead to a successful family venture.
Legal Essentials and Family Governance
Operating a family business in a professional manner necessitates establishing proper legal frameworks. Formal agreements are vital—clearly documenting roles, ownership, and decision-making processes. If multiple family members co-own the business, it is prudent to create a partnership or shareholders’ agreement that outlines each individual’s responsibilities, authority in decision-making, and protocols for exits. This proactive approach helps mitigate disputes by addressing potential issues such as retirement or strategic disagreements ahead of time.
It is crucial to maintain clear boundaries between family life and work. Personal matters can easily affect the business if not managed, so it’s recommended to limit “shop talk” to business hours and ensure all parties understand their roles. Effective communication is essential—clarify expectations and ensure all voices are heard.
When necessary, consider bringing in outside expertise—non-family members can fill skill gaps and offer unbiased perspectives to counterbalance insular decision-making. Ensure that both family and non-family staff are treated equally and professionally to avoid any perceptions of nepotism. An external mentor or a small advisory board can also assist in maintaining an objective course for your business.
Example: Australia is home to many lasting family businesses that have chosen their structures wisely. For example, Haigh’s Chocolates has remained a privately held family-owned entity since 1915, now led by the fourth generation. Another example is Coopers Brewery, established in 1862, which continues to be family-managed after six generations. These companies exemplify how proper planning and foundational decisions can create a lasting legacy.
Accounting, Finances, and Tax Compliance
Effective financial management is key to maintaining the health of your family business. Firstly, ensure that business finances are kept separate from personal finances—open a dedicated business bank account and refrain from using it for personal expenses. This practice simplifies bookkeeping and is viewed positively by the ATO. Consider leveraging accounting software or hiring a bookkeeper to monitor income and expenses, manage cash flow, and ensure timely payment of bills and taxes. Staying organised can also help maintain family harmony, as unexpected financial issues can strain relationships.
If family members are employed, treat them as you would any other employees for legal and tax purposes. This includes:
- Paying legal wages: at least the minimum award rate and making superannuation contributions.
- Keeping proper records: maintain timesheets and employment contracts.
- Avoiding artificial arrangements: do not pay family members who perform no genuine work or inflate wages solely for tax benefits. The ATO monitors these practices and can deny deductions for non-compliance.
One advantage of hiring family members is the opportunity to distribute income. For example, a lower-earning spouse or an older teenager can earn up to the tax-free threshold of approximately $18,200 without incurring income tax, while the business can still claim a deduction for their wages. Just ensure that any family member contributing to the business is paid fairly for their efforts.
Stay on Top of Tax Compliance
Ensure timely lodging of your BAS and tax returns, and meet payroll reporting requirements. Remember, qualifying small companies benefit from a lower company tax rate of 25%, and if using a trust, comply with rules for distributing income among family members. An accountant can assist you in navigating challenges such as fringe benefits tax and ensuring you are benefiting from applicable small-business tax concessions.
Planning for Succession and Long-term Success
Begin succession planning early—many advisors recommend initiating handover plans at least 3–5 years in advance. Engage in open discussions with your children or potential successors about their aspirations. Don’t assume they will automatically wish to take over. If not all your children are interested, develop a fair approach to address those who do not want involvement.
Gradually prepare the next generation by increasing their responsibilities and providing mentorship. Determine how and when leadership and ownership will transition—whether you opt to step back gradually or retire completely. Every family dynamic is unique—some transitions are seamless, while others may be fraught with emotion. An independent advisor can facilitate difficult conversations, and professional guidance will help ensure the transition is structured appropriately.
Conclusion
Managing a small to medium family business requires balancing family interests with commercial objectives. By establishing the right legal framework, ensuring robust accounting practices, maintaining tax compliance, and planning for growth and succession, you lay the groundwork for enduring success. Prioritise open communication and seek professional advice when needed—accountants, tax agents, and lawyers with experience in family businesses can provide invaluable support. With passion, careful strategy, and a bit of patience, your family enterprise can not only support your household today but also evolve into a meaningful legacy for future generations.
