Owning a Business with a Family Member

By Paule, Camazine & Blumenthal, P.C. of Paule, Camazine & Blumenthal, P.C. posted in Business and Corporate on Friday, August 24, 2012.

By Patricia L. Bland

A large portion of businesses started in the United States are organized by family members.  Whether the familial relationship is that of husband and wife, brother and sister, or parent and child, entering into a business relationship with a related person can pose unique challenges that one would not otherwise see in a new business.  This article will give some key tips to avoiding a breakdown or dissolution of a family business.

Separate Business and Emotions.  When a business is owned by related parties, it is easy for the business relationship to fail because of emotional or family conflicts.  Often, family disputes bleed into the business relationship, making operation of the business difficult or uncomfortable.  Similarly, business disputes can bleed into the familial relationship.  Family members desiring to start a business together should establish clear boundaries, define roles and responsibilities, and establish a plan for addressing disagreements among the business owners.

Adopt a Written Agreement Governing the Business Relationship.  To avoid having a business dispute among family members damage or entirely ruin the familial relationship, the family business partners should adopt a written agreement that defines ownership, compensation, duties and other matters.  Such a written agreement establishes the expectations of the parties at the outset of the business relationship and can avoid hard feelings or miscommunication among the family members in the future.

Identify an Appropriate Succession Plan.  A family business should have a formal succession plan that identifies how ownership of the business will pass on to the younger generation.  This plan should take into account financial needs of both the business and any retiring owners.  A firm succession plan can be drawn up in a Shareholder Agreement or Operating Agreement.  Seeking outside professional assistance in preparing the succession plan is a necessity.

Have a Clearly Defined Dispute Resolution Procedure.  In family businesses, generally the family members want each owner to have equal participation in the business.  That is why ownership of family business is often 50/50.  Or, if more than two owners, some other equal ownership.  The problem with 50/50 ownership is that in the event there is a dispute among the owners, there is no method by which decisions can be made on behalf of the business.  The family members should identify a dispute resolution procedure that can be invoked in the event of a deadlock or other dispute.  This could be the designation of a predetermined tie-breaking party with whom all parties are comfortable, or the adoption of some other dispute resolution procedure such as mediation or arbitration.

In establishing a family business or evaluating an established family business, it is important for you to talk to your attorney to determine what you can do to avoid some of the dangers and pitfalls of family business.

Disclaimer

Patricia L. Bland

Patricia L. Bland

A graduate of University of Missouri – Kansas City School of Law where she also received her Master of Law in Taxation, Patricia Bland's legal practice includes the areas of business law and commercial transactions. She also handles taxation, real estate and estate planning matters.

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