Protecting Your Family In A Family Business

By: Denise L. McNabb and Richard S. Schoenfeld

WHAT DOES IT MEAN TO “PROTECT YOUR FAMILYIN A FAMILY BUSINESS?”

The obvious answer perhaps is to build a successful business that financially provides for yourself and your family, while living the “American Dream” of owning your own business.

However, for anyone who has made the decision to go it on their own, the answer is much more in depth. Pressing issues often lie just beneath the surface after you or your spouse has made the decision to go into business for yourself. Deciding on how to structure your business as well as the operation of the business can be complex in the simplest of circumstances. The addition of family members to the business can add even more confusion and complexities to the structure.

There are many considerations from the onset of the decision to become a business owner, ranging from the decision to form a legal entity until the last days when the business is transferred to the next generation, or if the business is faced with dealing with an unexpected tragedy. In light of this, it is essential that you consult with your attorney and tax professional to create the best plan possible for you and your family in both protecting your assets and providing for a long, rewarding and successful business life.

DETERMINE TYPE OF BUSINESS ENTITY

One of the first things to consider is whether you should form a separate legal structure to run your business. The foremost purpose in forming a separate legal structure, such as a limited liability company or for-profit corporation, in family businesses is to legally separate the owner’s business from their personal assets. If, for example, you elect to operate a family business as a sole proprietor or partnership and the business is subjected to a lawsuit, then, in addition to your business assets, your home, cars and other personal assets could be at risk as well. Forming a limited liability company or corporation creates a “Corporate Veil” that helps establish a barrier between your personal and business assets.

In the event of a legal proceeding, the corporate veil makes it more difficult for a plaintiff to reach your personal assets. The selection of an appropriate business entity is a matter to be discussed with your attorney and tax professional.

IDENTIFY CLEAR ROLES

Another difficulty encountered in running a family business is establishing the roles of the members in that business. Failure to clearly identify roles of the individuals and members in the business can create chaos, confusion and hard feelings that may lead to a failed business. Ifat the onset of your business you elected to form a limited liability company or corporation, then the operating agreement and/or the bylaws can be drafted to more clearly identify the roles that the family members have agreed upon and envisioned prior to engaging in the business. In addition to providing a better structure for the operation of the business, this identification of roles can become crucial in the event of a separation, divorce, or even death of a family member in the business.

CREATE A SUCCESSION PLAN

Several other considerations must be taken into account if the business is successful and on-going, such as:

1) Is there an “exit strategy” or “succession plan” when the primary operator/ owner retires?

2) What would happen if the primary operator of the business becomes disabled?

3) What is the fate of the business if the owner passes away unexpectedly?

Most of us understand the need for proper succession and estate planning. But for family-owned businesses, estate planning can become even more crucial to provide for proper succession planning from one generation to the next. Business succession, family harmony, and treatment of children that are (or are not) involved in the daily aspects of the business are all important matters to address.

Ideally, a comprehensive plan will describe in detail how ownership is to be divided and how business affairs are to be handled when an owner passes away. Estate planning is a key component of family business plans. With the proper preparation and oversight, it is possible to avoid an array of potential pitfalls.

DEVELOP A COMPREHENSIVE FAMILY BUSINESS PLAN

Family-owned businesses have their own unique dynamics and history that few (if anyone!) outside of the family will fully understand. A comprehensive business plan makes it easier for the family business to transition from one generation to the next. This type of plan will include organizational documents, like an operating agreement, articles, bylaws, etc. It may also include buy-sell agreements, transfer restrictions, and even key-man life insurance. These documents should integrate seamlessly with the elder’s estate planning documents, such as a revocable or irrevocable trust, life insurance trust, or last will. A business succession and estate plan should also look at taxation issues as well.

It will take some time to develop a truly comprehensive family business plan that secures both business transition and your estate planning goals. This type of plan should take into consideration how active or inactive members of the family will be treated, if there are substantial non-business assets that may be left to non-active members, and ultimately how the elders feel about “fair” versus “equal.” Often elders will provide family members with an opportunity to contribute to the discussion and request feedback from all family members involved in the business. As the adage goes, “an ounce of prevention is worth a pound of cure.” While the unexpected will nevertheless come up, taking the time to develop a business succession plan as part of your overall estate plan will hopefully result in a smoother process with the increased changes of continued business success and family harmony.

Denise L. McNabb is an attorney practicing in the areas of trust and estate planning, elder law, long-term care planning, probate and has significant experience with small businesses, including business formation, contracts, and negotiations.

Richard S. Schoenfeld maintains a general practice with a focus in the areas of real estate law, commercial leasing, corporate law, and entity formation including general business operations and disputes, landlord and tenant law, business succession and estate planning.