Family businesses vs. corporations: What’s the difference?

A family business is usually owned and managed by family members, blending personal and business goals, whereas a corporation is a separate legal entity run by a board to prioritize profitability and shareholder interests. For small business owners, understanding these distinctions is essential as it influences succession planning, tax management, and, ultimately, the long-term success of their business.

You and your spouse have a great business idea, and everything’s set to bring it to life. All the groundwork is laid out, and now it’s time to make a crucial decision—how will you structure your company?

You’re thinking about the big picture, especially after learning that corporations in the US made about $3.5 trillion in profits in 2022^[1]. That’s a lot of money, and maybe you’re considering if you could join their ranks.

Then your spouse points out something even more interesting: family businesses make up 59% of the GDP—that’s about $5.5 trillion^[2]. Now, that’s a number that can’t be ignored.

But hold on, should these big numbers be the only thing guiding your decision? Profit figures come from all sorts of factors, and the business structure is just one part.

So, how do you figure out the best way to set up your business?

By actually understanding the differences between a family business and a corporation.

Start with this blog. We’ll help you understand the real differences so you can make the best choice for your big idea.

What is a family business?

A family business isn’t just any company where relatives work together; it’s defined by deeper connections and specific criteria. At its core, a family business involves at least two family members—whether related by blood, marriage, or adoption—who are actively involved in both the ownership and day-to-day operations.

But there’s more to it than just having family members on board. To truly be considered a family-owned business, one family member must hold a controlling stake in the company, wield significant decision-making power, and have control over the company’s voting rights. Additionally, the business should span multiple generations, with relatives from subsequent generations playing an active role in management.

Types of family businesses

Family businesses come in a few different forms, each with its own unique structure:

1. Family-owned businesses: These are businesses where family members not only work together but also hold the majority of ownership, giving them primary control over the company.
2. Family-managed and owned businesses: In this type, one family member holds a controlling stake, but the broader family plays a key role in setting policies and goals for the business.
3. Family-led and owned businesses: Here, one family member owns the business, while another family member serves on the board of directors, helping steer the company’s major decisions.

What is a corporation?

A corporation is a legal entity established by individuals, stockholders, or shareholders with the primary goal of generating profit. It operates independently of its owners, allowing it to enter into contracts, own assets, sue or be sued, pay taxes at both the federal and state levels, and borrow money from financial institutions.

It stands apart from its owners, almost like a person in the eyes of the law.

It can do many of the things an individual can do: enter into contracts, take out loans, hire employees, own property, and pay taxes.

One key feature that sets a corporation apart is limited liability. This means that while shareholders can profit from dividends and stock appreciation, they aren’t personally responsible for the company’s debts. This structure makes corporations the go-to choice for most large businesses.

Types of corporations

Corporations can be set up by a single individual or a group of shareholders, and they generally fall into two main categories: for-profit and not-for-profit.

For-profit corporations aim to generate revenue and provide returns to shareholders based on their ownership stake.

Not-for-profit corporations focus on charitable, educational, religious, or scientific purposes. Instead of distributing profits to shareholders, they use any revenue to support their mission.

Here are the three main types of business corporations:

1. C Corporation: This is the most common type of corporation. C Corporations have the typical features of a corporation, including the ability to generate profits and pay taxes as a separate entity. Shareholders receive profits but are taxed individually on their dividends.
2. S Corporation: An S Corporation starts out like a C Corporation but differs mainly in its tax treatment and shareholder structure. It can have up to 100 shareholders and doesn’t pay corporate taxes. Instead, profits and losses are reported on the shareholders’ personal income tax returns.
3. Non-profit corporation: This type of corporation is used by organizations with charitable, educational, or religious goals. Non-profits are exempt from federal taxes and any funds they receive are used to further their mission rather than being distributed to shareholders.

Family businesses vs. corporations: Key differences between family businesses and corporations 

1- Who owns and controls the business?

Family business

• Family members directly own and control the business, influencing decision-making based on the company’s original mission.
• Ownership can be passed to future generations, fostering long-term commitment and continuity.
• Family businesses often have the flexibility to adjust customer service and pricing more freely than corporations, due to less stringent requirements for public financial disclosure.
• Relational resources such as trust, communication, and a shared vision enhance participation in decision-making and operational strategies, maintaining family values and objectives.

Corporation

• Owned by shareholders and governed by a board of directors, often external parties who align decisions with corporate goals rather than personal ties.
• Shareholders typically seek short-term returns, leading to less personal investment in the company’s long-term success.
• Required by law to disclose financial information publicly, providing transparency about corporate operations.
• Decision-making power is concentrated among top executives, limiting direct influence from individual business owners or shareholders.
• Corporate structure facilitates handling regulatory measures but may lack the nuanced strategies and operational flexibility seen in family businesses.

2- How does the business continue?

Family business

• Typically, family businesses are owned by a single generation, and the future of the business can become uncertain once this generation concludes its leadership. The continuity of the business may be at risk as ownership could split among various heirs or might even dissolve.
• Developing a succession plan is crucial for family businesses, particularly one that navigates estate tax issues and manages generational transfers effectively.
• Succession planning in family businesses also involves balancing hereditary interests and the personal goals of family members, which often carry emotional weight. It’s essential to engage all family stakeholders in the planning process to align both individual and business objectives.
• Family businesses must continually innovate and adapt to remain competitive, especially as new generations introduce new ideas and approaches. This dynamic can create a constant need for renewal and adaptation to evolving market trends and cultural shifts.

Corporations

• Corporations typically have robust structures in place to ensure business continuity, even with changes in management or ownership. These structures support a seamless transition of leadership and ownership.
• Succession plans in corporations often focus on managing stock transfers and transitioning corporate leadership, ensuring that business operations can continue smoothly regardless of changes in executive positions or shareholder investments.
• Corporations benefit from established departments and divisions, which can simplify the continuity of the business compared to the often intricate dynamics of a family-owned business.

General considerations for both:

• Regardless of the type of organization, having a detailed succession plan that includes strategies for future management and leadership is vital for maintaining continuity. This plan should address market trends, customer preferences, and technological advancements to ensure successful transitions.
• Effective continuity planning helps both family businesses and corporations ensure the long-term success and stability of the organization, allowing them to thrive across generations or ownership changes.

3- What is the size and level of resources?

Family business

• Family businesses usually maintain a consistent size over longer periods, typically having fewer resources than larger corporate entities.
• Decision-making within family businesses is often a collective process that considers the perspectives and goals of each family member, prioritizing family interests over profit maximization.
• These businesses may offer lower rents and wages compared to what might be found in corporate settings, reflecting a different approach to growth and expansion.

Corporation

• Typically, corporations are larger than family-owned businesses, boasting greater access to various resources.
• They can raise capital by issuing stocks and bonds, allowing for more substantial expansion and investment compared to family businesses that often rely on retained earnings or bank loans.
• With their larger size, corporations benefit from economies of scale, achieving lower costs per unit in purchasing materials or services, and they generally have larger marketing budgets, enabling them to reach wider audiences.

4- What is the management like?

Family business

• Management in family businesses typically involves owners and top executives working closely with other employees, often within the same office space. This proximity facilitates a hands-on approach to day-to-day operations and fosters personal relationships with staff.
• The organizational culture in family businesses often emphasizes loyalty, community, and familiarity, enhancing a cohesive work environment.
• HR policies in family businesses may be less formalized, relying more on the interpersonal relationships and trust built across generations. This informality can lead to a more flexible and open atmosphere where employee well-being is a priority and issues are discussed openly.
• The management style is usually more personal, with a focus on hands-on decision-making and a strong emphasis on the welfare of employees.

Corporation

• Corporations are generally managed by a board of directors along with professionally hired management teams. This structure allows for a more formalized approach to business operations.
• HR policies in corporations are typically well-developed, covering recruitment, promotion, and employee development comprehensively, which supports the attraction and management of top-tier talent.
• Corporate culture may lack the interpersonal interaction and shared vision found in family businesses, often feeling more impersonal and focused on efficiency and profitability.
• The clear-cut management and reporting lines in corporations ensure that roles and expectations are well-defined, promoting efficiency, effective communication, and better resource management.
• While possibly perceived as less personal, corporations often offer significant employee benefits, including special packages and perks that smaller businesses might not provide.

5- How are decisions made?

Family business

• Family businesses typically prioritize responding to customer demands and maintaining operational stability over aggressive profit-seeking.
• Decisions in family businesses are often made internally, without the consultation of external professional advisors or other shareholders, leaning on familial ties and personal business experience.
• Family business leaders generally prefer a cautious approach to decision-making, focusing on long-term growth and wealth accumulation for future generations rather than short-term gains.
• There is a strong inclination to reinvest profits back into the business to build long-term value rather than distributing them as dividends or bonuses.
• Financial goals are closely intertwined with the personal income needs of the family, requiring careful management of resources to ensure both the business’s growth and the family’s financial security.

Corporations

• Corporations primarily aim to maximize profits and achieve financial objectives that enhance shareholder value.
• Corporate decisions typically involve detailed analyses and due diligence, incorporating input from various stakeholders and professional advisors.
• Corporations may adopt more aggressive strategies for expansion, facilitated by the presence of multiple decision-makers and access to substantial capital.
• Publicly traded corporations often focus on increasing quarterly profits and are under pressure to provide regular dividends and bonuses to shareholders.
• Corporate boards are governed by strict regulations that mandate transparency and accountability, relying heavily on market analysis and research to make informed decisions.

Family businesses vs. corporations: Real-life examples

When we talk about family businesses in the USA, one name that often comes to mind is

Walmart, originally founded by Sam Walton in 1962 and still run by the Walton family, really shows what family businesses can do when they integrate their core values into every part of their business. They’re on a mission to build a better world—helping people live better and renew the planet while building thriving, resilient communities^[3]. This vision directs all their big decisions, from green initiatives to community involvement and making sure prices stay low.

It’s clear the Walton family is committed to growth that matters—they’re not just about being the biggest retailer but also about making a positive mark on society. They balance holding onto their roots with pushing for important changes like diversity, equity, and affordability, proving that family values can indeed translate into powerful business strategies.

On the other hand, Apple Inc. serves as a classic example of a corporation.

Established by Steve Jobs, Steve Wozniak, and Ronald Wayne and later structured as a corporation, Apple operates independently of its founders today, governed by a board of directors and managed by a professional executive team.

This setup exemplifies corporate governance, where strategic decisions are aligned with the goals of profitability and technological innovation, not personal ties. Shareholders in Apple seek returns on their investment, influencing the company’s operations towards maximizing profit and ensuring transparency and accountability through public financial disclosures. Apple’s corporate structure facilitates its ability to operate on a global scale, innovate rapidly, and manage complex regulatory measures effectively.

How are family businesses taxed?

The IRS has specific rules for family-run businesses based on their type of entity. For example, Schedule C businesses, which include sole proprietorships, husband-wife partnerships, or LLCs taxed as sole proprietorships, have different regulations than S or C corporations.

For Schedule C businesses, you can hire children under 18, and their wages will be exempt from Social Security, Medicare (FICA)^[4], and Federal Unemployment Tax Act (FUTA)^[5] taxes. This exemption applies to both the employee’s and employer’s share of FICA taxes, benefiting both your business and your family.

On the other hand, if your family business is incorporated as an S or C corporation, your child’s wages will be subject to FICA and FUTA taxes, just like those of any other employee.

It’s important to note that a family business can also be a corporation. If it operates as a corporation, it will be taxed as such, which we will cover in detail in the upcoming sections. If the legal structure is not that of a corporation, the tax treatment will vary based on its specific legal form.

Are all relatives taxed? And how?

The IRS has specific rules for how family members are taxed based on their roles and relationships in a business. These rules vary depending on whether the family members are spouses or children, and their ages can further influence their tax status.

Spouses: When a couple runs a business together, sharing profits and losses, they may be considered partners by the IRS, even without a formal partnership agreement^[6]. As a married couple, they are exempt from Federal Unemployment Tax Act (FUTA) taxes but still need to handle income tax withholding and Social Security and Medicare taxes.

However, couples can opt for a qualified joint venture instead of a partnership if they file a joint tax return and both actively contribute to the business. In this case, each spouse is treated as a sole proprietor and must file individual Schedule C forms to report their share of the business’s profits and losses.

If one spouse is an employee of the other, the employed spouse’s wages are subject to Medicare and Social Security taxes and income tax withholding. They are, however, exempt from FUTA taxes.

Children: The tax treatment for children working in the family business depends on their age:

• Under 18 years old: If the business is a sole proprietorship or a partnership where both parents are involved, the child’s wages are exempt from Social Security, Medicare, and FUTA taxes.
• Aged 18 to 20 years: Children in this age group receive similar tax treatment to spouses; they are exempt from FUTA taxes but are subject to Social Security and Medicare taxes.
• 21 years and older: Once they turn 21, children are taxed like any other employee. This means their wages are subject to Social Security, Medicare, and FUTA taxes, regardless of their relationship to the employer.

Additionally, if a parent is in a business partnership with someone other than their spouse, the child’s wages will be subject to all applicable taxes. If the family business is a corporation or if the child works for an estate, their wages will also be subject to these taxes.

Other family members: Wages paid to other family members, such as grandchildren, aunts, or nephews, are subject to the same FICA and FUTA taxes as any other employee.

This differentiation in tax treatment helps ensure that family-run businesses navigate the complexities of tax regulations appropriately based on their specific circumstances.

Tax Cuts and Jobs Act implications for family businesses

Thanks to the Tax Cuts and Jobs Act (TCJA), the financial landscape for children working in family businesses has improved significantly. Before the TCJA, the standard deduction for a child employed by their family’s business was capped at $6,350. However, the TCJA has doubled this amount to $13,850 through 2025, offering a substantial tax break.

For the 2023 tax year, children under 18 can earn up to $13,850 before their wages are hit with federal income taxes, assuming they don’t have additional income from other sources.

For instance, a teenager helping out part-time in the family business and earning $10,000 can fully shield their earnings from income taxes using the 2023 standard deduction. This helps your child contribute financially to the family and allows them to save for future expenses like college or start building their retirement savings early with contributions to a Roth IRA.

Moreover, if your child earns less than the standard deduction while working a summer job at the family business, they won’t owe any federal income taxes. Keeping their earnings below the $13,850 threshold can be a strategic move to minimize their—and potentially your family’s—tax burden.

How are corporations taxed?

Distinct tax identity: Unlike partnerships, sole proprietorships, S corporations, and limited liability companies (LLCs), corporations are unique in that they are required to pay income taxes on their profits as separate entities. While other business structures allow profits to “pass-through” to the owners, who then report them on their personal tax returns, a corporation handles its tax obligations directly.

Taxable profits and deductible expenses: A corporation’s taxable profits include retained earnings (money saved within the company for expenses or growth) and dividends paid to shareholders. However, corporations can reduce their taxable income through deductions for legitimate business expenses. These deductions can include start-up costs, operating expenses, and expenditures on products and advertising.

Filing requirements and payment Schedules: Corporations must file a specific tax return, the IRS Form 1120^[7], and are subject to corporate income tax rates on their profits. They are required to estimate and pay their taxes quarterly—on the 15th day of the 4th, 6th, 9th, and 12th months of their fiscal year. For corporations following the calendar year, these dates align with April 15, June 15, September 15, and December 15.

Impact on shareholders: Shareholders who are employed by the corporation pay individual income taxes on their salaries and bonuses, which are deductible expenses for the corporation. However, when it comes to dividends, both the corporation and the shareholders face tax liabilities. Dividends do not qualify as deductible expenses, leading to what is known as “double taxation”—first at the corporate level and again at the individual level. This issue predominantly affects larger corporations, as smaller ones often compensate their owner-employees through salaries and bonuses, avoiding the dividend route.

Contrast with S Corporations: It’s important to distinguish between C corporations and S corporations. An S corporation benefits from pass-through taxation similar to partnerships and LLCs, meaning profits and losses are reported on the owners’ personal tax returns. This setup contrasts sharply with the taxation structure for C corporations, which handle their taxes at the corporate level.

Tax Cuts and Jobs Act implications: Under the Tax Cuts and Jobs Act, pass-through entities like sole proprietorships, partnerships, LLCs, and S corporations can deduct up to 20% of their net income on their personal tax returns through 2025. However, this deduction does not apply to C corporations, as they are not considered pass-through entities.

The bottom line

Understanding the differences between a family business and a corporation is crucial for you as a small business owner. The structure you choose will not only shape how your business operates day-to-day but also influence its long-term success, growth potential, and how it’s perceived by customers and the market.

Deciding on your business structure, whether at inception or considering a change in later years, is no small task. With US tax laws constantly evolving, navigating the complexities of business structures can be daunting. Fully understanding the implications of each option requires deep knowledge, and staying on top of regulatory changes can feel like a full-time job.

That’s where CoCountant steps in. Whether you’re looking to restructure to bring in new partners, optimize tax benefits, or ensure compliance across different states, we manage your bookkeeping and tax planning, ensuring full compliance with the IRS so that you can focus on your core responsibilities as a business owner.

FAQs

What governance challenges do family-owned businesses face compared to corporate entities?

Family-owned businesses often have informal structures, which can lead to conflicts and mix family issues with business matters. Corporate entities usually have formal governance with clear roles, reducing personal conflicts and promoting professionalism.

How do family-owned businesses and corporate entities differ in public perception? 

Family-owned businesses are often seen as personal, community-focused, and value-driven. In contrast, corporate entities might be viewed as more impersonal and profit-driven, but they benefit from strong branding and market positioning.

How can family businesses compete with larger corporate entities?

Family businesses can focus on niche markets, offer personalized services, and leverage their strong community ties and customer loyalty to compete with larger, less flexible corporate entities.

Are there legal advantages or disadvantages to being a family-owned business versus a corporation?

Family-owned businesses may benefit from simpler legal structures and favorable tax conditions but might miss out on certain protections and opportunities, like raising capital through issuing stock, that corporations enjoy.

How does leadership transfer differ between family-owned businesses and corporations?

In family businesses, leadership is often passed down within the family, sometimes regardless of the successor’s qualifications. Corporations usually have formal succession planning that focuses on selecting leaders based on experience and merit.

How does financial performance and reporting differ between family businesses and corporations?

Family businesses might not need to disclose detailed financial information publicly, making their financial health less transparent. Corporations, especially public ones, are required to report detailed financials, ensuring more transparency and accountability.

What are some common myths about family-owned businesses and corporate entities?

One myth is that family-owned businesses are always small, when in fact many are large and influential. Another is that corporations are always unethical, but many are committed to responsible and sustainable business practices.

What is an example of a corporation?

An example of a corporation is Apple Inc., a publicly traded company known for its consumer electronics, software, and online services.

Is Amazon a company or corporation?

Amazon is a corporation. Specifically, it is a publicly traded corporation (Amazon.com, Inc.) and operates as one of the largest e-commerce and cloud computing companies in the world.

Are family businesses more profitable?

The profitability of family businesses can vary widely. Some studies suggest that family businesses can be more profitable in the long term due to their focus on sustainability, conservative financial management, and strong customer relationships. However, this isn’t always the case, and profitability depends on many factors, including industry, management, and market conditions.