Starting a business with family can be a exciting endeavour for many people. However, it’s also one that can be fraught with danger if it’s not managed properly. It is a fact that not every family business turns out well. In some cases, disputes and disagreements can tear a family apart and cause irreconcilable differences.
If you intend on starting a business with family then it’s vital that you take the necessary legal precautions. Those legal precautions begin with getting three vital legal agreements in writing that we’ll be discussing in this blog post.
1. Family Business Agreement
A family business agreement sets out expectations about what can and can’t be done by each member of the business. It outlines the roles and responsibilities of each family member, and processes that must be followed for making important business decisions.
An example of this could be outlining how one family member will be responsible for the marketing and sales of the business and another for the accounting. This agreement would also elaborate on various tasks that will be carried out by the family member as part of each role and what he or she is allowed to do.
With this agreement in place, you will avoid many issues and obstacles that have derailed other family businesses. An example of such is the story of the Broccoli brothers in 1998. In this case, one of the brothers took out money from the company as a loan for another family owned business. This caused a dispute within the family that ended up in court because no agreements had been in place regarding who could authorise loans for the business and for what purpose.
Eventually, it destroyed the business that the brothers’ father had built in 1955. Sadly, it all could have been avoided with a family business agreement that outlined roles, responsibilities and expectations for each family member.
2. Family Business Buy-Sell Agreement
This is an invaluable legal document you absolutely must have in place before starting a business with family. This document determines what happens to your business in the event that one or more of the founding family members dies or suffers a tragic accident that renders them unable to continue with their usual business activities.
This document is a form of insurance that protects each family member and ensures that their rights are protected as founders and key players in the business. The kinds of things that can be protected by a family business buy-sell agreement are the amount of shares each family member has or how much money they’ll receive if they sell their share of the business one day.
They also protect the business from interference by third parties, which even includes other family members. An example of this is the case between Etienne v Miller. In this situation, two brothers had to defend their buy-sell agreement against third parties that were beneficiaries of the trust who challenged the value of the business that the brothers had set. In the end, the two brothers won because they already had a legally valid buy-sell agreement in place that was enforceable by the courts.
Before starting a business with family, you MUST get this document in place.
3. A Prenuptial Agreement
Sometimes, marriages don’t work out for whatever reason. This can have a big impact on what happens to the family business. Before starting a business with family, you need to get a prenuptial agreement that spells out in no uncertain terms what happens to the business in case of divorce.
This is true for any marriage and family business but especially for cases where one person founds a business, gets married and then their spouse becomes a part of the business. The last thing you want in this instance is to lose the business you founded to your spouse in the event of a divorce.
This happened during the case of Landers v Landers whereby the wife who owned a machine shop, as part of an inheritance from her father, had to give up 50% of her share of the business to her husband when the marriage dissolved. If she had gotten a legally valid prenuptial agreement, then she may have been able to keep her entire share of the business.
We understand that bringing up the topic of a prenuptial agreement with a spouse can be a tricky issue for many people, but especially when a family business is involved, it’s foolish not to have one.
Final Words: Starting A Business With Family
Starting a business with family can be an exciting endeavour but you should never do it without first getting these three crucial legal documents in writing. If you don’t, you potentially risk the destruction of your family, which could easily be avoided with the correct legal documentation, whenever a family dispute arises.
If you need more advice about this, we can get a full range of quotes for you from qualified lawyers. Contact us today.