Legal Challenges When Hiring Family Members

Legal Challenges When Hiring Family Members

By Bradley S. Hunt, Attorney

Bradley Hunt, Business Law, Education Law AttorneyFamily business ventures can be tricky. When the business partners all get along and agree on how to run the business, things can go very smoothly. But when there is dissent, the situation can become very personal. What happens when the disagreement leads to more than a refusal to speak to each other over Thanksgiving dinner at Grandma’s?

There are some practical challenges within any family business: Will the business close for a week while the family vacations together? Who will be the CEO, and will the other person’s feelings be hurt? Will everyone contribute the same number of hours of effort? Will the kids want to be part of the business? If they do, will they be qualified to run the company? The list goes on.

Above and beyond the practical considerations, there are some common legal issues you should consider:

  1. The operative word is business. It’s important that your family business (like any other) be set up as a legal entity, complete with a separate financial structure. Whether you choose to set up a partnership, LLC or incorporate, everything should be in the form of a legal agreement to protect each of the owners individually.
  2. I recommend you have a “buy sell agreement” in place. This could be part of the operating agreement and would apply in the event that the owners of the business are in a deadlock and cannot agree on how the business should continue to operate. Buy sell agreements also usually include a method on how to value the business and can guide the parties on the process in the event one owner would like to buy out the other owner.
  3. If family members are employed by the business, they should be treated as any other employee would be treated. Again, it doesn’t hurt to put expectations in writing in terms of job responsibilities, work hours, salary, vacation days, etc. Another thing to remember: if you employ non-family members, they will pick up on favoritism and resentment will build.
  4. If there are disagreements about how to run the family business, it might be wise to hire an independent analyst or coach (or attorney if the issues are legal in nature) to look at the situation with a fresh eye and make recommendations.
  5. Divorce impacts many family businesses each year. If you and your spouse are co-owners of a business, what happens if you decide to divorce? The stressors outside of the business can impact the health of the business during the divorce process. While it’s possible you could continue as co-owners, it is more likely an agreement will be reached as part of the divorce settlement and one of you will move on. Valuing the business then becomes the challenge.
  6. A succession plan is something all businesses should have in place, but it can be especially important for family businesses. Sit down early in the process and work through a succession plan. Keep it updated as the years pass and the skills and desires of family members in the business change. Be realistic, too. Many family business owners assume their children will have the same interest in and dedication to the business they do. If the interest or aptitude are not there, look at other options.

Setting expectations up front and communicating on a regular basis may help avoid some family business disputes. In cases where the family members cannot come to an agreement, or if help is needed with succession planning, it may be a good idea to bring in a business attorney to work on a resolution.