I Don’t Know What I Would Do Without My Volunteer Help
IMO, volunteer labor in small business is great! (That is, if the exit plan is to close down one day, and there is no risk that the volunteer(s) will ever cause trouble by demanding back-pay, equity-in-exchange for pay, or be a problem in the business that you can’t discipline because you don’t pay for the help.)
Outside of this, I caution against using it.
Yet, it is not unusual in small, new or struggling small businesses for family members and close friends to work on an unpaid or underpaid basis, who are sometimes also investors trying to “help” their investment along. It is also very common for owners to pay themselves less than it would cost them to hire their own replacement with the same level of productivity.
This invites a number of significant challenges to success:
I think the most common is relationship stress. Working with family members is not for every family dynamic, whether spouses, children, or non-household relatives. Friendships too have been stressed-out when unpaid business partners still felt like their investment bought them equal authority in day-to-day operations.
Unpaid workers are also difficult to discipline or hold to any standard, from being on-time to faithful at closing duties and everything in between. You don’t have much leverage with someone who can come and go at will. The same is true with someone you can’t fire, except to damage the relationship in asking them to be scarce. Related to the above, uncompensated labor can tend to be rather unreliable. One’s motivation to work for free can be conflicted, and inconsistent.
For the managing owner of a small business, free labor creates a false sense of security. The P&L statement is the ultimate measure of performance, and if those numbers do not adequately convey the value of all inputs into the business, including labor, then the P&L is going to project artificial profit (or artificially reduced loss). Owners should be using their financial statements like a doctor uses a test, and if an accurate reading is not being taken, the wrong decisions get made that can be life-threatening to the patient.
Ultimately, a small business owner would always like to have the option to sell the business and get a return on their equity and sweat investment. A business that looks like it might bring some blue sky upon selling can get quickly frustrated when an intelligent buyer asks the right questions during the due diligence phase of a purchase. If a savvy buyer discovers that the owner isn’t really paying or the spouse to do the bookkeeping, the kids to help customers, build bikes or clean up, or friends to get through busy sale periods, that buyer is going to make financial “adjustments” and offer a much lower price or even walk away from the table.
Finally, legal considerations must be mentioned if state law and/or insurance regulations requires an owner to abide by rules of employment even if employing under-the-table.
If you already have an unpaid/underpaid contributor, what can you do in the short term? One potential workaround is to put everything on the books like a customary employee, and with the employee’s written agreement, donate a market-rate paycheck to an agreed-upon charity as a 100% payroll deduction (and actually issue a pay stub to the employee with every payroll period). This can add at least some incentive to the “employee” to be mindful that someone is relying on their hard work if it is not they themselves. It also makes sure that the business is paying fairly for all labor and being valued accordingly.