Studies have shown that 35 percent of all Fortune 500 companies are “family businesses”. In fact, over 60% of the United States Gross Domestic Production comes from family businesses. For example, Walmart, Mars, and Comcast are all “family businesses.” But most family businesses are not like Walmart or Marriott – most are just like what you would expect – small, mom and pop businesses that are a great driver of the American dream and the American economy. If you are one of these more traditional family businesses, there are a few things that you should consider before starting out. After all, you want to ensure that you have a successful business, but also preserve important relationships.
Forming Your Business
The first and most common mistake is that the owners do not actually form a formal entity such as a limited liability company or corporation. It is common that businesses find themselves with unsatisfied customers and vendors or injured patrons. Forming an LLC or a corporation can help ensure that your personal assets, bank accounts, savings, and even you home are better protected from any potential complainant or worse – a creditor or judgment.
Dealing with the Worst Case Scenario
Another important advantage to the formal business entity is dealing with the worst of all possible events: death, personal bankruptcy, incapacity, divorce, etc… These are common occurrences within the family unit. With the right structure and governing documents, you and your family members can help ensure that everyone’s rights and responsibilities are clearly articulated. You can also ensure that if someone were to have to deal with one of these issues, that their interest in the entity is protected or that their interest transfers to the other owners.
Exit strategy is integral to any entity and the family business is no exception. Having the proper plan in place in case one of the owners decides to leave, sell their interest, or wants to devise it to an heir or beneficiary can save money, time, and save your other owners from a lot of headaches and heartburn!!!
In representing hundreds of small, family-owned business, a common recurrence is commingling business funds and debts with personal ones. It’s an easy trap to fall into as often times the business is your life. It is important, however, to ensure that business assets and dealings remain separate from your personal ones. Again, this is important to preserving your liability protection, but also keeps you in the good graces of your accountant.
Who’s going to do what?
This is also a common issue we see with family owned businesses. It is important that all the owners and operators of the family business know what their roles and responsibilities are. This is not only wise in any business, but particularly important in the family business as family businesses are often quite personal to the owners.
It is important to speak with a lawyer when deciding to strike out and form your family business. Starting a family business is an exciting adventure, especially if you can focus on growing your business and not dealing with some of the issues that come with a sole proprietorship or simple partnership. Take it from us, a family business can be extremely rewarding!
If you find yourself needing help navigating these complex situations, call our experienced attorneys today to see how we can help you.