Legal disputes in business are always challenging — but they can be especially difficult when you run a company with family members. Whether you operate a business with your spouse, parents, children, or siblings, it’s important to ensure you take the necessary measures to protect it from any conflicts that could arise. Establishing a solid foundation, ensuring the proper documentation is in place, and implementing effective legal strategies can help safeguard your family business from both internal disputes and external threats.
Here are several things you can do to help shield your family business from legal disputes:
1. Choose the Right Structure for Your Business
The first step to take to protect your family business is choosing the right legal structure. By setting up an LLC or corporation, you can help separate personal assets from business liabilities. It’s also important to clearly define each family member’s roles and responsibilities within the structure of the business to reduce the potential for misunderstandings.
2. Have Clear Agreements in Place
Even if you are in business with close family members, it’s crucial to have a clear operating agreement in place to mitigate the potential for disputes. Other agreements that can be used to prevent conflict in a family business can include the following:
- Family business agreements — This document outlines how the family will manage the business, the role each family member will play in the company, and decision-making processes.
- Partnership agreements — A partnership agreement should be used in a family business to define ownership shares, specify profit distribution, and outline decision-making authority.
- Employment contracts — Employment contracts can help ensure family members understand their responsibilities and are treated the same as other employees.
- Nondisclosure agreements — Nondisclosure agreements can help protect confidential and proprietary business information from being divulged by family members.
- Buy-sell agreements — Buy-sell agreements can establish the procedures that must be followed in the event of an ownership transfer due to death, retirement, or dispute.
Additionally, it’s critical to ensure compliance with any industry-specific regulations. There may be certain legal documents that are necessary, depending on the type of business.
3. Keep the Lines of Communication Open
Effective communication is the foundation of every successful company — it’s vital to create an environment in which everyone feels comfortable sharing their opinions and concerns. Encourage frequent communication, hold regular meetings, address complaints promptly, and promote transparency to ensure everyone is on the same page. Set ground rules for communication that prioritize open dialogue, respect, and clarity.
4. Ensure Family and Business Finances are Separate
Commingling personal and business finances is one of the most common reasons disputes arise in family businesses. Establish clear financial policies and maintain separate accounts for personal and business purposes. Regardless of how much you trust your family members, you should still conduct regular audits and financial reviews to identify potential issues and make any changes necessary.
5. Implement a Succession Plan
Business succession planning can help ensure a smooth transition when one generation decides it is time to pass the business to the next. A comprehensive succession plan can outline leadership roles, establish measures for continuity, take family dynamics into account, and mitigate potential risks. It can also minimize disruption, preserve the culture of the company, and ensure that future leaders of the company are prepared to step into their roles.
6. Consider Mediation
Family business disputes are often emotionally charged. While litigation is time-consuming, costly, and public, mediation can offer an alternative dispute resolution method that can help minimize conflict and prioritize family relationships. By using mediation, family members can work toward an amicable resolution and find creative solutions that might not be available in the courtroom.
Contact an Experienced Long Island Business Attorney
Disputes in family business are not uncommon and can have a devastating impact on your company’s operations and bottom line. An experienced business dispute attorney can help safeguard your interests and ensure the success of your family-owned business for generations to come. At Barnes & Barnes, P.C., we represent clients for a wide range of family business matters and work to achieve a positive outcome in every case. Contact us at (516) 673-0674 to schedule a consultation.
