Best in Law: It's a Family Affair! How to Avoid the Pitfalls - Six Legal Tips to Running a Family Business

Best Best & Krieger LLP

Best Best & Krieger LLP

Many successful businesses are family-owned. There is an unmatched pride that comes from building a business that has the capability of being passed down through generations. Yet, a family business faces unique challenges. Work leaks over into life, personalities collide, and business is almost always personal.
Success requires family communication, a cohesive business strategy, a solid ownership structure, and strong corporate governance. A dispute in one area will spill over to the other.
Here are six tips to keep the family business going strong.
Don’t play “Family Feud.” Family businesses are often threatened by an inability to separate business from personal problems. Often a feud turns to animosity, and unresolved feelings about who “Dad liked best.” Conflict between family members trickles down to employees, and makes it impossible to achieve common goals. Regardless of the cause, find a way to end the bad feelings before they take over and turn into lawsuits.
Define roles and relationships. Family members should not be on the payroll if they are not working for and contributing to the success of the company. Establish clear roles, responsibilities, job titles and compensation. Family discussions on these issues should be regular and transparent to help set expectations. Have annual performance reviews of family members, just like any other employee.
Beware of 50/50 ownership. A 50/50 split of ownership is challenging when personal or business interests diverge and there is no ultimate decision maker. Ownership disputes have a negative impact on employees, operations and — consequently — profits. If there is a 50/50 split, consult with an attorney before any dispute arises to draft an agreement that calls for an efficient “tie breaker” method. In general, a detailed operating agreement that is well thought out can head off many conflicts.
Work as a team. Family businesses often have issues growing and succeeding because non-family members feel like outsiders with less opportunity. Treat family employees the same as non-family employees. Take caution that you do not create an environment where an employee is not invested in the company because they are not part of the family. Bonuses, phantom stock plans and other benefits are just a few ways to reward valuable, non-family employees. A successful business needs a mix of people to grow.
Do not act without communicating. Many business issues arise from a failure to communicate. This is particularly true in family businesses where hurt feelings and unmet expectations among family members can fester and become problematic. Inclusion and regular communication can help avoid a costly and emotional lawsuit.
Plan for the future. It is your ultimate hope that your business reaches the next generation. However, many businesses ignore succession planning. If the lines of responsibility, authority and “what happens next” are not well planned, it can cause instability in the business. Like in so many other areas mentioned here, communication is critical. Many disputes erupt after the passing of the “founding generation” because of unspoken expectations.
This article first appeared in The Press-Enterprise on June 11, 2017. Republished with permission.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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