Fatal Legal Mistakes Family Businesses Can Avoid With Planning
Anyone involved in a family business knows that working with family has its pleasures and its pitfalls. However, some legal pitfalls can prove deadly to your family business. Here is a list of four commonly seen mistakes and how to fix them with fairly simple planning.
1. Mixing family & business finances. Unfortunately, we live in a litigious society, so as soon as your family business is up and running, it’s important to shelter your personal assets by forming a legal entity like a corporation or limited liability company, which will protect the personal assets of investors/owners (i.e., family members) from business liabilities. Without that protection, everyone’s assets are vulnerable if something goes wrong with the business.
2. No business license. Many businesses, even those that are home-based, require a local, state or federal license to operate. Without the proper license(s), you can face stiff fines or even be shut down. Your city hall or county government office can tell you what is necessary to operate your business legally in your area of Colorado.
3. No agreements. Unless you want employment in your family business to be a birthright, you need to have employment (or Independent Contractor) agreements that spell out – in writing – what the expectations are for the job each family member is doing and how they will be compensated. These agreements should also have termination guidelines because there will probably come a time when you will have to transition a relative out. Having a written agreement to refer back to can help keep things civil and maintain important personal and familial relationships.
4. No succession plan. You must start your business with the end in mind so you can ensure your business takes care of your family throughout all of your life’s stages, including retirement and beyond your life as well. And what happens if the person who started it all suddenly wants to cash out, falls ill or dies? If you want your business to go on without you, a succession plan that spells out how this will be accomplished is crucial.
If you’re a small or mid-size business owner, call us today at 720-248-7621 to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit or LIFT Start Up Session.
