Posted on 4.7.16 by Christian Mancier
Starting up a business with your sister, brother (7 of them in the case of Seven Brothers Brewery!), cousin or any other family member sounds great during the ideas phase and certainly can be great going forward. It can also be challenging. Risky because of the complicated family ties and relationships that naturally occur as well as potential pressure from other family members to be a success.
The key for any start-up family business from a legal point of view is to ensure that the parties involved have carefully documented at the very beginning of their venture how they intend to operate their business going forward. Inevitably this is going to involve some potentially difficult conversations around what happens if someone dies, is taken seriously ill or there is a falling out. As with most things of this nature, the thought it always worse than is the actual. It’s best to get such discussions out of the way whilst everyone is enthused and pulling in the same direction and the business has negligible value. Once discussed, proverbial weights are lifted and the air is clear and ripe for business success!
One approach to mitigate future risk is to write or amend the Company’s Articles of Association, which are essentially the company’s constitutional documentation and by preparing a Shareholders’ Agreement. These written rules of corporate governance set out the roles and responsibilities of the shareholders and outline a clear decision making process going forward, including any restrictions that may come into play.
It is also worth adopting a holistic approach both to the legal documentation and the advice sought after. For example, it is advisable for each shareholder to make sure that the provisions outlined in the Company’s Articles of Association are reflected in their personal Will, which comes into effect on the death of a shareholder. Aligning these two documents means that uncertainty is greatly minimised, as is the risk of a dispute further down the line which is heightened when there are two contrasting provisions.
Furthermore, it is also worth making sure that any proposed legal structure fits in with tax and accountancy advice so you don’t incur any unexpected tax implications down the line. For this, a joint discussion with an experienced independent financial advisor may provide an insurance backed solution to some of the points arising from initial discussions.
Why Hold Discussions at the Beginning?
In short, everyone is positive and gunning towards the same goals. This doesn’t have to change as the business develops and in many cases it doesn’t, but this is usually a sure-fired thing at the beginning. Trying to have such discussions about the future or trying to put documentation in place further down the line can be more problematic. This can be for a number of reasons, such as the formation of cracks in family relationships which can cross over into the business or when the business has grown and has gathered considerable value, it is nigh on impossible to do and agree; this is often a case of trying to close the stable door once the horse has bolted.
Early discussions put your family business on track for the future and make everyone’s role, responsibility and position crystal clear going forward.
If you have just started a new family business or you are an entrepreneur looking to go into business with a friend and would like to discuss Shareholder Agreements, Articles of Association or any other corporate legal issue, give me a call today on 0343 507 5151 or email firstname.lastname@example.org.