Should you start a business with your family?

Starting your own business can be a dream come true. Starting a business with your family can be the ultimate in work/life balance. Any family business must, however, work as a business. This includes making sure that you stay in compliance with all applicable laws, including (and arguably especially) tax laws. With that in mind, here is some guidance to help.

To explain further, Peter Scully, Marketing Consultant at Rogers Spencer Chartered Accountants, looks further into the topic of starting a family business.

Make sure that company ownership is clear

If you’re a sole trader then essentially you are your business. If you’re not, however, you need to make very sure that the ownership of the company is clear, fair and realistic. For example, making your spouse a shareholder can be a useful way to lower your tax liability when you take profits out of the business.

Shareholders can claim a certain level of dividend income tax-free (currently £2K). What’s more, dividend income is treated separately from income from employment. Depending on your situation, this can also be an advantage.

Always remember, however, that shareholders are, essentially, company owners and have all the rights that fact implies. This means that you need to think about what would happen if there was a major disagreement between you and your shareholder, for example, you and your spouse decided to divorce.

You also need to think about what would happen to your company if a shareholder were to die (or become incapable). If the shareholder was your spouse, you could inherit their shares without paying Inheritance Tax. For other family members, however, the situation could be more complicated.

Family members must be treated the same way as everyone else

Most legal and tax compliance boils down to this simple rule. Make sure that you know what the laws are and follow them both in spirit and in letter. What’s more, be prepared to demonstrate that you have followed them in both spirit and in letter.

In other words, document everything accurately and completely and make sure that your documentation is kept up to date. It is impossible to overstate the importance of making sure that your documentation reflects what is actually happening rather than what was happening when it was first created. The importance is even greater when you are employing your own family.

For example, let’s say you employ your spouse to do basic admin work part-time. You pay them a reasonable salary for that role. Over time, however, their hours increase and they take on extra responsibilities. You, therefore, give them a raise. If you update your documentation accordingly, you’re covered if HMRC takes an interest. If you don’t, you could find yourself under investigation.

On a similar note, it’s also important to avoid underpaying your staff. If they’re over 16 they qualify for the relevant minimum wage. You may also have to pay national insurance for them and auto-enrol them into a pension scheme. Last but definitely not least, if they are entitled to any benefits, such as holidays, make sure that they receive them.

Employing family members

In general, employing family members is essentially the same as employing anyone else. It simply means that your business’ profits stay in the family. There are, however, some opportunities to finesse this to meet other goals. For example, you could employ a family member to do just enough work to use up their personal income tax allowance.

Similarly, you could give family members enough work for your business to pay National Insurance on their behalf. Paying national insurance may help them to build up their entitlement to other benefits. What’s more, this needn’t actually cost your business anything. If it qualifies for the Employment Allowance you can get up to £4K per employee to pay for Class 1 NICs.

Hiring family members as freelancers

On a similar note, in principle, you can hire family members as freelancers in the same way as you would hire anyone else. In practice, you may want to be careful here. Remember, that you need to be able to show that the person is a legitimate freelancer otherwise they will be caught up in IR35.

Realistically, this is unlikely to be an issue with people who freelance regularly. Where it may get tricky, however, is with people who are just starting out as freelancers. If you’re their only customer or by far their most important customer, you may find that HMRC sees them as an employee or at least as a worker.