How to deal with legal issues in a Family-owned business.
Starting a business with members of your family may seem like a very cool idea, I mean they are your family members, you trust them and they would not cheat you out of the business like a total stranger would.
Unfortunately things are not always the way they seem especially with a family business.
Like every other business, they are not exempted from the legal challenges facing many businesses today.
One of the major legal challenge of a family owned business is lack of proper legal structure.
Family members usually don't like to properly set up their business and implement legal tools to help protect their business.
Here are seven (7) ways to navigate the legal issues that may arise in a family owned business.
1: Be comfortable with the fact that you are starting a business with your family members. No shame in that, doesn't make it less of a business.
2: understand that even though they are your family members they are also your business partners .
So look beyond blood ties and deal with them as you will with a non-family business partner.
This means, that if you would not partner with a person with a character defect ordinarily, you should not make concession for that kind of person only because you are family.
- Insist on building a proper business
You should aim to build a business that will outlive you.
Your goal should be to not only run a profitable business but also to run a legally legally protected and legally compliant business. - Choose the right legal structure for your family owned business.
Incorporating the company as a Limited Liability Company (LLC) is obviously the right legal structure for a family owned business for many reasons.
a. A(n) LLC can help you separate the business from the owners of the business. In fact, the business itself is seen as a separate artificial person that can make it's own decision.
This is what we mean when we say a Company enjoys separate legal personality distinct from that of its owners.
With a(n) LLC, you can clearly state the ownership stake of each family member.
If a husband, a wife and say wife's cousin, decide to start a family business, the shares or equity owned by each family member should be clearly negotiated.
Will they take equal shares, or will the shares be according to each person's contribution?
The same rules of equity split that applies to non family business applies also to a family-owned business. - Insist on documentation
Have a partnership, founders and shareholders Agreement and subject the shares to a share vesting schedule of at least 4 years with a one year cliff period.
Have proper employment contracts in place with clearly defined roles and responsibilities - Have a dispute resolution process in place
Understand that like every other business disputes must arise so agree on how disputes will be handled bearing in mind that you are not just family members but actual business partners.
Your Agreements should have a dispute resolution clause. - Protect the Intellectual property rights in the company and its products.
Ensure that the company actually owns the IP in the work done for the company by the family members or other people.
Please, note a family business is first and foremost like anyother business, the only difference is that it is run by members of a family.
So like every other business, there should be proper legal structures in place.
Always to your #LegalSense