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Legal Mistakes That Family Businesses Make and How to Avoid them

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Owning a family business is a great way to increase household income and explore interests outside one’s professional capacity. Most family businesses start as hobbies, and sometimes people make mistakes that put the company at risk.

Talking to an experienced family lawyer can help provide guidelines on how to safeguard your business legally. Here are mistakes that small businesses make that excellent legal advice can prevent.

Mixing Romance and Business

Romantic relationships are complicated, and when introduced into the family business, they can have adverse effects. Romantic partners may hamper decision making by doing things to frustrate each other because they have relationship problems. It is crucial to remember that one should not involve new romantic interest in their company. Romantic partners who must work together in the family business must learn to separate personal issues and business issues.

Lack of a License

When people start businesses in their homes, they may not get a license for them. Just like one needs to have contracts with all the employees, they need to have the business licensed by the state or the local government. Speaking to a lawyer would help family business owners learn about the licenses they need to run their business. It is essential to recognize that while a business license is not expensive, not having one can attract very high fines.

Mixing Family Finances with Business Finances

finances

As noted above, many family businesses start as hobbies or side hustles to make extra income for the family. If members of the family have signed loans or made cash contributions, it is essential to register the business as a separate legal entity. Doing that will protect the family members from liability in case the company is in financial trouble. Registering the company as an LLC protects the family from liability and ensures that profits are not taxed.

No Employment Contracts

In a family business, people avoid talking about salaries and employment contracts because those conversations are awkward. It is, however, important to discuss what each person involved expects. Members should talk about their payment expectations, their roles, and what happens in the event of a dissolution. All agreements should be in writing and signed by all the people concerned. The business can hire a family lawyer to help with the process. When something goes wrong, the agreements will ensure disputes are resolved amicably.

Division of the Business

When the original owner of the business is not able to run it or passes on, it is up to their children to continue running the business. For people who have more than five or six children, it may create problems regarding decision making. That is because they all have an equal share in the business and therefore will need to take sides on all decisions. That type of situation can adversely affect the management of the company. To prevent this, business owners should have a clear succession plan drawn-up.

A family-owned business should remain the family and keep providing income for future generations. Family law attorneys can guide you on how to protect your business from the above problems.

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