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How to Structure a Family Business

Starting and managing a family business can be rewarding for everyone involved.  It is the foundation of many long-standing and profitable businesses as well.  That said there are certain legal parameters that should be put in place prior to officially beginning a family business.

Define the Roles

Like any new business that begins with multiple partners it is vital that that the role of each person is defined.  What will be the role of each family member (daily manager, salesperson, bookkeeper)? What will be expected of each person?  Perhaps one family member will be very active in the business managing it on a daily business and another may invest money but play a less active role in management.  Outlining expectations in the beginning will help each family understand their individual responsibilities. This will help limit future misunderstandings that could hinder the success of the business.        

Form the Business

Once everyone is in agreement about their roles and responsibilities, next up is to actually form the business.  Contact a business lawyer to assist you with selecting the appropriate business entity for your business model.  The legal entity (such as an LLC or corporation) will need to be registered with the state and each family member who is investing in the business may be listed in the articles of formation/incorporation. 

Get it in Writing

After completing all the steps to register and form your business, it is strongly advised that you have a governing agreement prepared to document all of the decisions you have made about ownership and management of the family business.  For example, if you have formed an LLC, you should have an operating agreement prepared that outlines each family member’s ownership interest in the business (ex. dad owns 50%, daughter owns 25%, cousin owns 25%).  And those defined roles I mentioned earlier will be formally documented too.  This agreement will help you govern the legal aspects of running your family business and can be referred to when in doubt as to ownership and duties.

Family businesses can be wonderful or a nightmare if not properly defined, formed or documented.  Be sure to structure your family venture properly to set the foundation for success.

This blog posting is provided only for general informational and educational purposes and does not constitute legal advice or legal opinions.  An attorney-client relationship is only established with the firm via a formally, mutually signed engagement agreement.

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