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The Family Business: Avoid These 4 Lethal Legal Mistakes

Business Finances / Business Succession / Contractors and Employees / Family Business / Legal Agreements / Starting Your Business / Sticky Situations / Unexpected Business Risks

If you operate a family-owned business, or are considering starting one up, there are four potentially lethal legal mistakes you should take care to avoid, including:

No employment agreements.  Family members who work together are usually hesitant to confront one another if someone isn’t pulling their weight.  Having an employment agreement for everyone ensures that expectations for job performance are spelled out and what the grounds are for termination.

Mixing family and business finances.  Many family businesses start with loans from various members, and as the business grows, those initial investments need to be protected.  This is the stage when you want to consider setting up your family enterprise as a limited liability company (LLC) or a corporation.  Most small businesses use an LLC structure, which provides liability protection for personal assets and allows for company profits to flow through to owners.

No licenses.  Even if you operate out of your home, you will likely need to obtain a local, state or federal license to operate your family business.  While licenses are generally inexpensive, the fines for not having them can be costly.  You can find out what the requirements are in your area by contacting your city hall or county office.

No succession plan.  Family business feuds can easily occur when there is no succession plan in place.  In addition, legally speaking, if a business has not been incorporated or formed as an LLC, the business dies when its owner does.  If you started a family business to keep it in the family, you need to follow through with a formal succession plan.

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