Keep it in the Family? Why Family Businesses Need a Good Attorney, Too
A family business can become a lasting legacy, passed down for generations. But professional and personal interests don’t always mix as well as everyone hopes. Even the closest families can find themselves at odds.
While some might prefer to keep family conflict to themselves and resolve issues privately, it is better to find a lawyer to help out a family business. A family business lawyer can be a neutral, unbiased advisor who keeps the company on track and maintains family harmony.
Safeguarding a Family Business
Family businesses come in all sizes—from a mom and pop shop or siblings’ startup to a multi-million dollar company with thousands of employees. Their defining feature is the fact that two or more family members operate the business and have majority ownership and control of its operations. Roughly 19% of companies in the U.S. are family-owned.
While family ties and shared values are often at the heart of these businesses, those things won’t guarantee success. Only 30% of family businesses survive into the second generation. Only 12% are intact by the third.
It’s easy to guess why this is true. In addition to all of the issues that any company faces, a family business also faces family dynamics that make business decisions more complicated. Conflicting ideas, egos, and personalities are not just matters for the HR department—they can be deeply personal matters that can harm both the business and close relationships.
Sometimes there is a desire to keep family issues private, but that can compound the problem. A better option is to find a business lawyer who the family members trust. A family business attorney can help structure the company and its operations to withstand disagreements and drama that can come with a family business.
A Catalog of Common Family Business Challenges
Launching a new business with a family member, or bringing a child or sibling into an existing business should be handled carefully—because, unfortunately, the initial sense of camaraderie and togetherness can sour with time.
These are some of the issues to consider when family is involved:
- Old grudges, sibling rivalries, and trust issues can come to a head when family members have to work together.
- Conflicts with non-family employees can arise if there is nepotism or members of the family are held to lesser standards.
- Being related can make reprimanding or firing someone difficult.
- Disagreements about the company’s direction can interfere with important business decisions (for example hiring and firing, business expansion, selling assets, mergers and acquisitions).
- Unclear boundaries can lead to business matters spilling over into personal life, and vice versa.
- Personal events (birth, death, illness, marriage, or divorce) can complicate the structure and ownership of the company.
Anticipating and planning for potential problems like these can increase the chances of a family business’s long-term success. Preparing by getting legal advice should be considered realistic, not pessimistic.
It’s human nature to think that one’s own family is different and would never let personal feelings stand in the way of success. But no one can predict what will happen over time. A parent might need to reprimand or even fire their child. One sibling might decide they want to leave. Two cousins could both assume they’ll take control when the owner passes away. Or an ex-spouse (or other non-family member) could inherit part ownership due to a sudden death.
Having a lawyer to help out a family business is beneficial. They can plan for possible future scenarios like these so the company and its employees are protected.
The Role a Corporate Lawyer Can Play in a Family Business
There are several ways in which a corporate lawyer can make life easier for family businesses:
Structuring the Business. How the business is structured will affect how much say each family member has in the company. How much does each person want to be involved in day-to-day operations? Will they be active partners or just investors? Will the levels of ownership be equal? Will major decisions be made by a primary person, by the majority, or will everyone need to agree?
These are all things an attorney can help make official. Ideally, this should happen when the business is formed. But a lawyer can be brought in at any time to consult and get things set up properly.
Drawing up documents. A business lawyer can advise whether the business should be an LLC or a corporation and assist in drawing up or revising the necessary documents such as articles of incorporation, bylaws, operating agreements, non-disclosure agreements, and shareholder agreements.
Attorneys will also recommend and write various contracts directly related to family businesses. For example, family employment policies, exit provisions, conflict resolution protocols, shared capital strategies, and even prenuptial agreements. Having these instruments in writing can help to diffuse future arguments by providing a blueprint for what should happen or who should make decisions should a crisis arise.
Solidifying succession plans. In a broader sense, it is important for a lawyer to help out a family business in clarifying their vision for the future and put policies in place to ensure it. One of the most important, yet most neglected things to consider is succession planning. Only 34% of family-run businesses have a documented succession plan. In other words, there is no plan for transitioning from the current owner to the next if that person retires or passes away. Not only have family business owners not thought about how they will hand over the reins, most have not even decided who will take over. A survey taken of business owners who expect to retire within five years found that 47% had not yet named a successor.
This can leave family members in limbo about the future. (The entire hit TV series Succession is based on this premise.) And it can be catastrophic if something happens unexpectedly to the primary owner. A family business lawyer will see that there is a clear plan in place and that wills and powers of attorney are current. This allows the company to carry on with a smooth transition, despite a tragic event.
Other Ways a Business Lawyer Assists Family Businesses
Many family business lawyers become trusted confidants and valued members of the team. As such, they might be called upon to provide guidance on various business matters. These are just some of the services families might take advantage of:
- Formalizing family members’ roles and responsibilities and the leadership structure.
- Assisting members in separating their business and personal finances.
- Creating exit plans and non-compete agreements for family members leaving the company
- Advising on tax implications of things such as opening a new location, buying or selling assets, going public, or a corporate lawsuit.
- Crisis management and litigation when necessary.
- An unbiased sounding board and go-between to facilitate communication among members.
A Business Lawyer Should Be Part of the Family Business Team
Every business should have an attorney who can help them create the necessary documents and establish the corporate structure. For a family business, the need is even greater because of the possibility of personal conflicts interfering with business operations.
There is much more invested in a family business than just money. There is a greater sense of pride and dedication that can make it something special. But there are also personal feelings and emotions that can be its downfall.
Chris Swiecicki’s extensive experience in business law, taxation, and employment law has given him a deep understanding of what it takes to make a family business succeed. He is happy to discuss strategies that will help keep your family business legacy intact for the next generation and beyond.
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