What's the Difference Between a Family Business and a Corporation?
It may be hard to decide whether you should start a family business or stick with the conventional corporate option. Some of the main differences between a family business and a corporation are scope, ownership, structure, management style, decision-making process and continuity. Knowing these areas of contrast can help you make an informed decision about which is best for you.
Ownership and Control.
Ownership and control are two of the main distinguishing features between a family business and a corporation. In most cases, members of the family have direct ownership in the business and control decision-making processes. Conversely, corporations are owned by shareholders and board of directors, which are typically outside entities who make decisions on behalf of the company’s corporate goals.
In a family business, all family members tend to share responsibilities, which are often focused on carrying out the company’s original mission. The ability to pass on ownership to future generations also provides an ongoing incentive for families to remain committed to the success of their business. Corporations, on the other hand, typically have less personal investment and long-term incentives for shareholders as most shareholders are looking for short-term returns. Furthermore, corporations are required by law to publicly report financial information that can provide insight into how the company is run. Family businesses often keep their finances closely held which can result in them being more flexible with customer service and pricing than comparable corporations.
While family businesses offer unique advantages, they are not without their own unique challenges. The close personal investment among family members in a family business can make it difficult to resolve disputes should disagreements arise. Additionally, just because a business is family-owned doesn't automatically exempt it from government regulations, such as tax and labor laws—so staying on top of changing compliance measures can be a daunting task for any business. Nevertheless, the advent of technology and access to resources beyond the traditional corporate model mean that families can now run successful enterprises that preserve their values and objectives while producing tangible gains for shareholders.
In the traditional corporate model, decision-making power is concentrated in the top executives. Business owners and shareholders have little influence or access to senior personnel. Meanwhile, family businesses are based on relational resources like trust, communication and a shared vision of success among all members—giving the entire team the opportunity to participate in decision-making and growth. Family business members tend to have an intimate understanding of each other's decisions and intentions, leading to streamlined operations and more nuanced strategies for tackling regulatory measures. With carefully crafted policies that protect the values and interests of all family members, families can create a profitable enterprise that also serves their own long-term objectives.
Size and Resources.
Generally, a corporation is much larger in size than a family-owned business, and has access to more resources. Corporations have access to more capital during the expansion process, can employ higher numbers of workers, and obtain better economies of scale when purchasing materials or services. Family businesses tend to remain within the same size range for longer periods of time and may not have the same level of resources as a corporation.
In a family business, decisions are typically made collectively after considering the opinions and goals of each family member. There is also a tendency to make decisions in the best interest of the family as opposed to maximizing profits or share price as might be the case with a corporation. Furthermore, rents and wages could be lower in a family business than if expanded under corporate ownership. On the other hand, corporations are more likely to undertake riskier investments and operate under stricter protocols.
For example, corporations can access more capital than family businesses since they are able to issue stocks and bonds whereas family businesses must finance their investments through retained earnings or borrow from banks. Furthermore, corporations tend to have larger marketing budgets which makes them better suited for reaching broader audiences. At the same time, giving respect to the resources of a family business allow them to have scale and agility that corporations struggle to match. Ultimately, it is up to each business to decide which form of ownership works best for the company's goals and vision.
Family businesses have the advantage of having direct familial involvement in the operations and decision-making process. Despite many family businesses having an overall smaller size, being family-owned allows these companies to understand their customers better as there is already an intrinsic trust among family members. At the same time, family business also benefit from certain tax deductions such as avoiding double taxation on dividend payments and having a lower corporate capital gains rate compared to corporations. Another clear difference between a corporation and a family business are the resources available to them.
When it comes to continuity, family businesses and corporations both have distinct differences. Family businesses generally involve a single generation of owners; at the end of that single generational line, the business continuity remains unclear as ownership may be divided between different heirs or dissolved entirely. On the other hand, corporations often have specific structures in place so that business continuation can remain constant even with changes in management and ownership.
Despite their differences, when it comes to business continuity, having a succession plan is essential. This plan should clearly outline the succession of ownership and management positions that will ensure the on-going success of the company. A family business may need a plan that addresses estate tax issues and generational transfers, while corporations might require something more tailored towards stock transfers and corporate leadership transition management. In either case, making sure that an appropriate strategy is in place for future business management is important for maintaining continuity whatever the size or type of organization.
A family business has to contend with various dynamics and goals, including hereditary aspects and emotional values. All family members should be consulted in a succession plan, understanding their goals both for the business and their individual lives. Corporations may need a succession plan that focuses on releasing the investment of shareholders once the success criteria has been reached which could be measured in profits, returns or other outcomes. Thoroughly understanding and studying market trends, customer preferences and appropriate technology is also crucial for successful transition management of each organization. By taking into account these considerations when creating a succession plan each organization can ensure effective continuity of ownership and management roles from one year to the next.
Family businesses will also need to assess their ability to remain competitive in dynamic markets and cultures that may be constantly changing. As new generations come into the family business, there is pressure for continual renewal of ideas and commitment to staying ahead of trends. Corporations on the other hand, will have divisions and departments with more established structures and processes in place, potentially making some tasks less complex than with a family-owned company. Additionally, shareholders often provide financial support as well as external oversight making working capital readily available. Due to this nature of financing, corporate entities can create large investments in unique projects or technology innovation quickly should they deem it necessary. With proper planning both types of organizations can find creative ways to streamline succession ensuring long-term success.
Financial Goals and Decision Making Processes.
While family businesses are typically focused on responding to customer demands and ensuring stability, corporations prioritize gaining profits and accomplishing their financial goals. Furthermore, their decision making processes often differ because family businesses usually make decisions without input from professional advisors or other shareholders, whereas corporations engage in rigorous analyses and due diligence processes before committing to any action.
Some studies have shown that private family businesses are more likely to reinvest their profits for long-term growth, whereas public companies need to consider the shareholders’ interests and allocate most of their profits as dividends or bonuses. Though there may be exceptions, family business leaders tend to move cautiously when making decisions because they are more conservative about taking risks, whereas corporations may expand quickly due to the higher number of decision makers.
Financial goals in a family business are often closely linked to the personal income needs of the owners. There is often less emphasis on short-term gains, and more emphasis on building wealth for generations to come. On the other hand, publicly traded corporations tend to place primary focus on increasing quarterly profits and providing dividends or bonuses for shareholders. Decisions made by corporate boards typically have higher stakes since they’re governed by laws that protect stakeholders from irresponsible decisions. Family business decision makers, however, may use familial ties and years of understanding to make educated decisions that balance short-term needs with long-term sustainability.
As family businesses often lack access to capital markets and large-scale returns, it is important they manage operations efficiently while maintaining a private ownership arrangement. This means decision makers must weigh necessary investments in the business versus drawing out money for short-term personal needs, as well as succession planning. Corporations face different risks and rewards when it comes to taking calculated financial risks, so they tend to rely more heavily on established systems of market analysis and research processes. Ultimately, each type of organization can benefit from careful and informed financial decision-making that considers the interests of all stakeholders.
Management Structures and HR Policies.
In family businesses, owners and top executives often work side by side with other employees in the same office. This enables them to have better control over their day-to-day operations and engage in more personal relationships with staff members. On the other hand, corporations are typically managed by a board of directors and professionally hired teams of management or executive personnel. They also tend to have much more developed human resource policies for recruitment, promotion and development of staff.
One key difference to note is the culture of the organization. A family business may have a strong sense of loyalty among employees, a sense of community and familiarity that can be seen in day-to-day operations. A corporate structure may not have the same type of interpersonal interaction or shared vision that often comes from working together for several generations within the same company. At the same time though, corporations oftentimes have more expansive resources and budgets to be able to bring in top tier talent and hire professionals for different jobs. This allows them to achieve ambitious objectives in ways which are simply not possible for smaller companies.
With a corporate structure, employees can have more clear-cut management and reporting lines. Having this structure in place helps to ensure that everyone is on the same page and knows their role and expectations within the organization. This can prompt greater efficiency, better focus on objectives, delegation of tasks and responsibilities and improved communication among employees which ultimately leads to better management of resources. A family business often has fewer HR policies in place because it relies heavily on interpersonal relationships between different generations of family members. They may not need complex HR or legal structures because there is an implicit trust between family members.
A family business tends to be more ‘hands-on’, allowing for a personal touch when it comes to employee management and decision making. A family-run business is also likely to prioritize employees' well-being and focus on creating an open and friendly work environment where issues can be discussed freely, with the benefit of having close family members involved. On the other hand, big corporations may be perceived as colder and more distant, but they can offer special packages and perks that smaller businesses may not have access to. Ultimately, weighing the pros and cons of each type of setup will dictate which route is right for your company.