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26 January 2017 Posted by 


Agreements can avoid pitfalls

By Justin Dowd

THERE’S a unique dynamic that exists in family businesses.

Often mum or dad, or both, start off in business and as their company grows other family members are recruited and before you know it, a whole new, if not complex, family business structure has evolved.

So the best tip that can be offered to someone looking to set up a family business is be prepared and plan.

It is important to get the structure right – will it be a company, partnership, or joint venture? Lawyers and accountants can help establish the structure of a business and any requirements like registrations, licences and insurances.

From a legal point of view, these are the same for any business but a family business is by its definition conducted by members of a family and it can be difficult to separate the family from the business.

A well thought out and clearly defined business structure that includes the common goals and vision of the company and the exact role each family member will play can help avoid any pitfalls and ensure its success.

Because the primary relationship amongst the workers is personal as opposed to business partners, families are less likely to document what is necessary and are more likely to misunderstand what is expected of them.

That is why it is important when structuring a family business that from the outset each person’s role and responsibilities are clearly defined and outlined.

This will help ensure the good running of the business.

When bringing family members into the business, it is important to talk about expectations – those of the owners and those of the workers.

A child may expect to become a part-owner at some point and, if so, it needs to be discussed early on at what point this may happen.

Often has been the case that a child believes they will take over the running of the business but that is not necessarily in the mind of the owner so it is important to have that discussion.

Voting rights are an important aspect of the business structure, for example, what level of say will each member have?

The temptation, when running a family business, is to bring in a spouse or partner so it is important to think about the unthinkable: what will happen should a death, disabling injury or divorce occur.

Have some understanding of what impact either of these will have on the business and protect against it.

For example, key persons insurance (an insurance policy on the key employee that pays a benefit to the company if that person dies) might be appropriate.

It may also be advisable to enter into an agreement that explains should separation or divorce occur, whether the business will be divided equally or sold and divided.

There is no doubt these are difficult discussions to be had and while unromantic, they are necessary.

The agreements will be unique to your family and to your business but they will go a long way to navigating any pitfalls that may arise.

Justin Dowd is a partner at Watts McCray family law specialists.





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