Legal Considerations For Keeping Your Business Within The Family

Establishing a family-owned business can be an exciting and lucrative opportunity, but it's challenging. According to statistics on, only 12% of family businesses transition to the second and third generation. One of the reasons family-owned companies fail is poor succession planning because of differing opinions and disputes between family members.

To overcome this obstacle and keep the business running for generations, founders must prevent relationships from becoming rivalries. However, like other businesses, there are legal factors family businesses must consider to survive past the third generation. Below are the top legal considerations for keeping your business within the family. 

Choose A Formal Business Structure

The lack of a well-defined business entity can lead to business failure when disagreements over management arise. Therefore, establish a legal structure for your family's business ownership. Depending on the company's vision and goals, you can operate as a sole proprietorship, private company, partnership or trust. 

Your business structure will affect the legal obligations and rights of family business partners and the business. For example, if your family chooses to operate the business as a company, you need a Shareholder Agreement document. This legal document helps keep the business within the family by preventing family members from transferring their equity to outsiders. 

Estate Planning

While estate planning focuses on individual owners of the family enterprise, it protects your legacy in the business. For example, let's say your family-owned business is incorporated as a sole proprietorship. You can write a will that states how you wish your company and assets to be managed after your death. You could also give your successor a power of attorney to give them authority to manage family business transactions if you cannot work.

Estate planning is simple, but you might need a local lawyer to answer questions about your will. For instance, hiring a Tampa estate planning lawyer is a wise decision if you're in Tampa, Florida. A local estate planning attorney understands state-specific business laws and will help you create a robust estate plan for protecting personal and business assets. 

Employment Policy

An employment policy helps align the expectations of family members working in the business to avoid feuds. For example, you can add a policy that requires family members to complete college and work elsewhere before joining the company. The employment policy should also outline equal treatment for family and non-family employees to avoid favoritism. Some successful family businesses have a policy that requires a family member to report to a non-family employee and receive a market salary. You could include this in the employment agreement. 

Succession Business Plan

A succession plan highlights whether the transition of a family business includes ownership, leadership, or both. It also defines the timeframe of transitioning from generation to generation and the role older generations play. 

When writing a family business succession plan, follow a process that considers the opinions of shareholders, management, and prospective successors. Doing so brings a sense of professionalism to the business and ensures the successor is accepted as legitimate. 

Managing a family business is tricky as it involves mixing personal and professional life. Too often, family members become rivals because of differing opinions regarding business management. Fortunately, you can prevent long-term family feuds in a family enterprise if you focus on the legal aspects of the business. These legal requirements include forming a legal entity, estate planning, writing an employment policy, and creating a succession plan.