What is Family Business? Definition, Types, Structure and Examples

A family business is a business that is owned, operated and handled by two or more members of a family. These members should be blood-related, related by marriage or adoption. A family-owned business has to have the following qualities-

• A sole family has to own the majority percentage of the ownership
• Has to have control over the voting system.
• Possess power in strategic decision-making.
• Multiple generations of that single-family have to be involved in that business.
• The same family has to draw the senior management of that firm.

A family business is of utter significance in the economy of a country. It is one of the oldest economic systems with a substantial contribution to the GNP or Gross National Product of a country, total export, and total employment. 

Did you know?

The world’s oldest family business is Hoshi Ryokan, a hotel owned and operated by the same family since 718. This is a business that has been in existence for 46 generations!  

Family Business Examples

Some noted family business organisations around the world are as follows.

Also Read: 5 Best Startup Books You Must Read to Understand About Startup Businesses

Family Business Characteristics 

Some of the main elements and characteristics of family business are-

• Members: Family business management is conducted by a group of individuals who are also the members of a single family is the owner and runs the enterprise.
• Position of members: The role and position of the family members in the business enterprise depend upon the relationship between the members.
• Control: The family exercises control over the enterprise since the family is the major shareholder in the company.
• Mutual Interest: The family members who hold key positions in the business are supposed to influence the business policies as determined by the mutual interest of the firm and the family. 
• Involving Multiple Generations: The family looks after the business management and operations, and thus the rein is passed from one generation to the next.
• Mutual Trust: All family members must have mutual trust in every involved member since they have a mutual origin, the same values, business orientation and ethics.
• Integrity and Transparency: These characteristics are built by strong moral principles and determination toward business goals and honesty in transparency in business. 

Types of Family Business

There are in general three types of family businesses. They are as follows-

1. Family Owned Business: This kind of business refers to the one which controls the size of the significant and controlling ownership stake. This stake is controlled and owned by the family members.
2. Family Managed and owned Business: In these businesses, a single family or an individual member of the family owns the controlling stake of the business. The major owner allows the family to create and decide upon the objectives, policies and methods. 
3. Family Led and Owned Business: In this kind of business, while the owner can belong to the family or a member of the family, at least another family member should be a member of the company’s board of directors. The family member can therefore influence major strategies, direction and plans.

Other than these business ownership models, there can be First Generation Entrepreneurs and Second Generation Entrepreneurs.

First Generation Entrepreneurs

They are the ones who invest money and take risks and uncertainties of setting up a new business. They create wealth and is the pioneer of the business. They innovate and come up with new ideas to create a successful business. 

Second Generation Entrepreneurs 

The Second Generation Entrepreneur controls and runs the previously established business of their parents and grand parents. However, their decisions and activities will be under examination. They involve in the business as middle and top-level management, and after they showcase their potential in handling business craftily, they are handed over the rein of the business. 

Also Read: List of Top 10 Creative Small Business Ideas | Legaltree

Structure of A Family Business 

A family business system runs following a three-circle model as represented underneath:

The first circle refers to ‘ownership’, the second circle symbolises ‘family’, and the third circle stands for ‘business’. The different entity definitions are as follows:

• Non-family non-manager owners: These kinds of owners are external investors who own a particular proportion of the entity but do not work.
• Family owners: These set of groups consist of family members who own a certain portion of the business yet do not participate in its operations.
• Family owner-employees: This kind of ownership involves owning and working as an employee in the company, mostly as a top managerial position-holder.
• Non-family owners employees: This is a group of individuals who are not family members, yet they are working employees in the firm and own a specific portion of share capital.
• Family members: This group consists of all family members who work for the company but do not have any share in the company’s capital.
• Non-family employees: These employees of the business firm work under the employment contract, and they are not members of the family and do not own shares in the firm.

Advantages and Disadvantages of a Family-owned Business

The advantages and disadvantages of a family-owned business are as follows

Advantages

1. Stability: Since there is longevity in the leadership position, there is stability in a family-owned business. In these businesses, a leader stays in the position for years with different life events like retirement, illness or death triggering the change at the top.
2. Commitment: Family businesses have a greater inclination toward commitment and accountability than non-family firms due to their need for business as well as the family. These characteristics foster benefits like understanding the industry, organisation and job, effective marketing and stronger customer relationships.
3. Flexibility: While non-family businesses have delineated responsibilities for individual roles, the members of family businesses can take on tasks outside of their pre-determined roles.
4. Long-term Outlook: Non-family firms have to draw goals for the coming quarter, while family firms can think of the goals decades ahead. This long-term perspective can foster clear decision-making culture throughout the business.

Also Read: How to Expand a Business – 18 Strategies for Quickly Expanding a Business

Disadvantages

1. Lack of Family Interest: Sometimes, future generations are not interested in participating in the business. This might result in unenthusiastic, apathetic and disengaged workforce management.
2. Conflicts Between Family Members: The relationship between family members, family history and the almost blurred boundary between work life and family life can be conflicting. Family connections make these issues more complex.
3. Lack of Structure: Since family businesses depend on trust and loyalty, they may lack proper internal rules as well as external corporate law. 
4. Nepotism: Some family businesses promote the family members for senior managerial positions, even though these members lack the education, skills and potential to embrace those responsibilities. This is a drawback that negatively impacts the company’s success.
5. Succession planning: Many family-run businesses lack clearly defined succession plans. In the case of an emergency need to appoint a successor due to a scandal, illness or death, it might become hard for the business to decide upon the successor.

Conclusion:

At the initial stage, while setting up the business, is a stage of ordinary business. However, with the passing of time, other generations of the founder’s family and extended family started participating in the business, making it a successful family business. The key managerial ranks of that company are mostly occupied by family members. 

Follow Legal Tree for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.