Too often with family businesses, the family quotient creates a certain level of informality. The informality exists because there is an implied trust that comes along with being family. A family member would not steal from or take unnecessary risks with the family business. However, for some family businesses such a reliance on an assumption can be lead to unfortunate consequences. Though, valuable at the beginning, family relationships bring into the business all of their history - good, bad, and the ugly.
Business formality is where the family business creates boundaries for all that history without adding to it. It starts with governance. Governance meaning board of directors. It is critical that the family business follow its by-laws to establish a culture of accountability for the business' leadership. If the governance is controlled by family members or insiders, then it is strongly recommended that there be an outsider or outsiders presence as a counter-measure to a narrowing of perspectives. An outsider is a form of disruptive innovation for governance because he or she will question what is assumed by the family.
Another level of business formality is an organizational structure and processes that define roles and responsibilities, compensation, and performance evaluations. At the beginning of a family business, this may be viewed as unnecessary, but it is arguably the best time implement it. Without a formal organizational structure and processes, the family business becomes loose with its operational benchmarks and strategies. And as the family business grows it can also be a confusing situation for employees because the family members are not held to the same standards of conduct - a potential legal issue for the family business.
A family business is a wealth creation vehicle for the benefit of the family. To protect that, the family must maintain business formality otherwise it courts destroying that wealth before it can be realized and destroying family relationships that have been realized.