Woodland Hills Business Law Blog

Family Businesses: Simple Steps to Avoid Common Pitfalls

If you have a family business or are thinking about starting one, kudos to you! There are few better ways to create tradition, meaning and bonds within a family, and a family business can be a gratifying way by which to build wealth.

Family enterprises, however, can bring conflict, legal challenges and financial distress when simple preventative steps are not taken. A business law attorney can assist you with the following issues commonly faced by family businesses:

• The absence of a succession plan. If the leader of a business dies, sells or becomes incapacitated, the business he or she leaves behind will appoint a leader, somehow, by necessity. The succession process at that point, however, will likely be complicated, and the result may not be optimal for the business or your family. An attorney can assist in identifying all of your options, and help you select one that works best for you and your business. For instance, if the business belongs exclusively to you, you can simply leave it to the person you feel should own and run it. If the business is professional in nature, such as a medical or legal practice, you can identify an outside buyer/successor and prepare him or her using a process agreeable to both of you. If the business belongs to two or more family members or other individuals, a contractual succession plan can be devised, lessening stress both now and at the time the succession occurs.
   
• The lack of employment agreements. It’s rare that families who start businesses together are initially comfortable discussing the particulars of vacation and sick days, wages, raises and absenteeism. Yet these issues affect every business and will affect yours. The time for all parties to discuss expectations and rules is now, before issues arise, not later, when issues have already led to resentment and confusion.
   
• The failure to acquire a business license. Often, small business start-ups skip the step of acquiring a business license that may be required in a particular industry, perhaps choosing instead to wait and see whether the business will succeed. It’s important, though, not to avoid this step. By not acquiring a business license and necessary zoning permits and by not meeting other legal requirements, you expose your business not only to penalties but also the possibility of being shut down with financial and reputational consequences that accompany an unexpected closing.
   
• Mixing personal and business funds. The separation of personal and business funds isn’t just good business; it can save you money. When personal money “disappears” into a business owned by you and others, you’ve lost at least part of those funds regardless of how successfully they’re put to use by the business. An issue related to separating personal and business funds is that of separating personal liability from that of the business. By housing the business in a legal entity, such as a corporation or limited liability company, you can shield yourself from liabilities faced by the business.

Drafting contracts, obtaining needed licenses, negotiating with municipal entities and selecting and creating a business entity can involve complex legal issues. To ensure success and to protect your interests, contact a qualified business law attorney.