Running a Family Business Within the Law

Are you starting or currently operating a family business? Whether you're working with your spouse, your child, or with the whole family, you should be aware of several regulations that make your business different.

Although family-run businesses must comply with all general legal steps in starting and managing operations, being in business with family can have additional implications. Here are the guidelines for running a family-owned business within the law:

Working with a Spouse

Choosing to run a business with your husband or wife can be difficult on many levels. Legally, this relationship will affect the way your business pays taxes. Although most spouse-run businesses are considered partnerships, and pay taxes as such, you have the option to opt out of this classification and instead your can be treated as sole proprietors for tax purposes. It's important to understand IRS guidelines and requirements and consider how each classification would affect your business. Before deciding on a classification.

For more information on the implications of running a business with your husband or wife, read the article Starting a Business With Your Spouse.

Employing Your Child

Many family-run businesses allow their children to help out in one way or another. If you chose to employ one or more of your children, it's important to remember that this decision will affect the way your business is taxed.

Payments made to a child who works for his or her parent are regulated by a different set of guidelines than a general employee. Generally speaking,

payments made to children working for a paren;s sole proprietorship or partnership where each partner is a parent may not be subject to social security or Medicare taxes. Additionally, payments made to children under the age of 21 (except those in situations mentioned above) may not be subject to Federal Unemployment tax. Tax information is always subject to change, so for the most up-to-date information, see IRS.gov.
 

Employment of a child is also affected by child labor law regulations. Although there are strict laws that detail appropriate jobs and hours based on age, children working for a parent generally fall under an exception to these laws. I-s important for parents to examine these laws closely because there are some instances where they are required to uphold the same standards as all other child employers. An example of this would be for those involved in a hazardous occupation- as determined by the Department of Labor. No parent is allowed to employ their child in one of these occupations if they are under the age of 16.

For more information on these laws and their exceptions, read the article Employing Young People in the Workforce.

Employing a Parent

Payments made to a parent employed by their child are also held to a slightly different set of guidelines. Similar to normal employees, all payments are a subject to income tax withholding and most payments are subject to social security and Medicare taxes. Unlike normal employees however, under certain circumstances, social security and Medicare taxes may not be withheld. Check with your state department of revenue for details in your area. In all cases, payments are not subject to the Federal Unemployment tax.

Related Resources

For more information on family run businesses, check out the IRS guide to Family Help.

Edited for spelling and punctuation.