How to Avoid Family Business Disputes

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How to Avoid Family Business Disputes

Do you have a family business? Approximately 90 percent of American businesses are family-owned or controlled, according to the U.S. Census Bureau. These companies range from sole proprietorships to Fortune 500 firms and account for over 60 percent of U.S. employment and half the nation’s GDP.

Considering these statistics, you may be surprised to learn that only 30 percent of family-owned businesses survive into the second generation of ownership, according to the Family Firm Institute. While the reasons for this failure to thrive are varied, there are some common issues family-owned businesses face.

One common challenge is the emotional aspect of working with relatives. Shared family history can be fraught with the potential for conflict. Another challenge is the tendency for families to employ relatives without regard to capability or talent, opting for peace in the family instead of doing what is best for the business.

The following actions can help family-owned businesses deal more effectively with the inevitable conflicts:

Employment agreements. Family members who work together are usually hesitant to confront one another if someone isn’t pulling their weight. Having an employment agreement for everyone ensures that expectations for job performance are spelled out and what the grounds are for termination.

A succession plan. Family business feuds can easily occur when there is no succession plan in place. In addition, legally speaking, if a business has not been incorporated or formed as an LLC, the business dies when its owner does. If you started a family business to keep it in the family, you need to follow through with a formal succession plan.

No employment promises. Companies that base employment on skill rather than familial relationships survive more readily than those that guarantee employment for family members. Setting rigorous standards for family involvement is key.

Protection for family and business finances. Many family businesses start with loans from various members, and as the business grows, those initial investments need to be protected. This is the stage when you want to consider setting up your family enterprise as a limited liability company (LLC) or a corporation. Most small businesses use an LLC structure, which provides liability protection for personal assets and allows for company profits to flow through to owners.

Outside counsel. Family businesses that thrive for the long haul have either a board or a “kitchen cabinet” of outside advisers to help them with the big decisions.

Williams Mestaz, L.L.P., is a law firm with decades of experience in commercial litigation, including IP infringement, employee lawsuits, business divorce, aviation, and high stakes litigation. Contact us at (602) 256-9400 and schedule a time to meet with us today.

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