When you're starting a new business, the mere idea of hiring your first employees can seem daunting. You have to find job candidates, interview them and then decide which of these people you trust enough to hire—all at a time when you have so much work to do that you can barely think. No wonder that instead of going through this effort, many startup entrepreneurs choose employees closer to home: their own family members.

There are several advantages to hiring members of your family to work in your startup:

  • Known quality: You already know the person and have a good idea of their work ethic, past work history and personality. You won't have to do a background check, or lie awake at night worrying that your job candidate has a criminal record.
  • Tax advantages: If you hire your child under age 18 to work in a sole proprietorship or a partnership in which both partners are parents of the child, the child's wages are not subject to Social Security and Medicare taxes. If you hire your spouse or your parent to work in your business, that person's wages are not subject to FUTA tax. If you hire your child under age 18, you may even be able to shift some of your income to their lower tax bracket and realize tax savings this way. (Consult your accountant and follow IRS guidelines regarding tax treatment of family members.)
  • Building a dynasty: Hiring family members can be the beginning of a lasting family business. Family members will often take more pride in their jobs than outsiders, and can be highly motivated, especially if they have hopes of leading the business one day.
  • Cost savings: In addition to the tax savings they can provide you, family members may be willing to work for lower pay than other employees—especially when your business is just starting out.

However, it's important to honestly assess the risks of hiring family members.

  • Entitlement: Even a family member with a stellar employment record may take advantage of your relationship when he or she comes to work for you.
  • Discipline issues: How easy will it be to discipline the family member you are considering hiring? What will you do if he or she doesn’t live up to your expectations? Will you feel comfortable doing employee reviews of the person?
  • Perception of nepotism: If you start out hiring family members, as your business grows you may find it difficult to hire nonfamily members. Whether fairly or not, outsiders may believe that they won't get fair treatment at your company and that family members will always come first.
  • Authority problems: Family members who treat you with familiarity can undermine your authority with nonfamily employees, causing discipline issues throughout the company.
  • Gossip: Family members who work in the business may gossip about your personal life with nonfamily employees or may tell your family members things about your business that you'd rather keep private.
  • Unrealistic expectations: If you hire your brother, will your aunt expect the same treatment for your lazy, unskilled cousin? Consider the message that hiring one family member could send to others in your family.

If you hire family members, take these steps to help the arrangement run smoothly:

  • Write an employee handbook, and have your family member sign an employment agreement just as you would with any employee. Make sure your relative understands that the same rules apply to all employees.
  • Hire family members on a trial basis. For example, set a 60- to 90-day probationary period during which the family member may be let go if your expectations aren't met. (This is a good idea when hiring any employee.)
  • Hire family members only if their skills and experience fit the job. Never hire a family member as a favor. Doing so is the surest way to regret your decision.