Family Business- Why is it important to put things in writing?
Family businesses account for nearly two thirds of businesses in the UK and are often considered to be the backbone of the economy.[1] There are many benefits and drawbacks to starting a family business, especially when it comes to making big decisions. Unless roles and responsibilities are clearly defined, there are risks of disagreements occurring which could be detrimental in the long term.
What is a family business?
Although there is no set legal definition on what a family business looks like, it is commonly acknowledged that a family business encompasses three elements:
- the family owns a majority of the voting shares or effectively controls the business and
- one or more family members (or their spouses) are involved in the management of the business and
- more than one generation is, or will in future, become involved in the business.[2]
Benefits of a having a family business
Loyalty- As you are likely to go through ups and downs in a business, strong family ties means that members of your family are able to support you through the hard times.
Costs- It may be that family members are willing to accept lower wages and make some sacrifices for the sake of the business. This is really valuable in cases of financial crisis as you know that your family is here to help.
Commitment- A successful business takes time and requires employees to go above and beyond to strengthen it. Family members are likely to put in longer hours to make this happen and adapt to a flexible way of working if needed.
Drawbacks
Conflict- This is one of the biggest issues in family businesses and it can lead to major setbacks if not handled carefully.
Succession- It may become difficult to decide who will take over the family business and this may lead to fights between siblings or other members of the family. It is important to look at this objectively and choose who has the most appropriate qualities and experience to lead the company forward.
Lack of expertise- At times you may find that family members are appointed to senior positions but aren’t qualified for the role. This can cause serious conflict between junior staff and colleagues, especially those who aren’t part of the family, leading to a stressful work environment.
The importance of written agreements
Shareholder agreement
- This is a contract between the shareholders of a business that aim to provide a form of protection concerning ownership.
- This is a private piece of document that outlines the board of directors, voting rights, value of shares, transfer of these shares, dividends, dispute resolutions along with other areas of the business practice.
Partnership agreement
- A partnership agreement governs major aspects of the business and how it is run. This includes partnership shares, property, terms for termination, terms which protect your interests, voting and other rights and responsibilities.
- This type of agreement is suitable for members of a family that are looking to start a business e.g. brother and sister or groups of friends working together.
- Without an agreement in place, the provisions of the Partnership Act 1890 will apply which may be unfavourable for some family members in the business.
The main difference between these agreements is that the shareholder agreement is mainly associated with a shareholder (someone who has an investment in the company), whereas a partnership agreement covers terms related to a partner in the business (a friend or family member that helps run and operate the business).
How can MLS help?
My Local Solicitors Ltd are experts in getting family businesses off on the right foot. Our business solicitors proved flexible, cost-effective legal advice to help you identify your legal requirements and grow your family business the safe and legal way.
Get in touch on 01244 478 730 to discuss our essential legal documents package.
Why not start with our essential legal documents package which includes:
- A consultation with a solicitor.
- Terms & conditions of business.
- Confidentiality agreement.
- Consultancy agreement/employment contract.
- One round of amendments.
- Final documents.
This article is for information purposes only and legal advice should be taken for individual circumstances.
