Building a family business is hard work. Mix in marriage, in-laws and the prospect of divorce, and success in a family business may seem impossible. But with careful corporate planning, family businesses can thrive through the years, and survive any family turmoil.
I asked Judith Bachman, Esq., a corporate attorney, for her top five tips on how to best protect and grow a family business to account for the risks posed by marriage and divorce. Her tips center on foundational corporate documents that serve a variety of valuable purposes - - they can guarantee continuity no matter the marital status of the family members, and they also protect owners from personal liability, and ensure stability by setting everyone’s expectations in advance. These documents should:
1- Establish and maintain formal corporate protections. To have a strong corporate shield to insulate personal assets from claims of disgruntled family members and third parties, businesses must have by-laws, a board of directors, issued stock certificates, and directors’ and shareholders’ meetings with minutes and resolutions. Without these items, courts will consider the business and personal assets of the owners to be one and the same, and both sets of assets will be equally reachable in any litigation, including divorce.
2- Have involuntary buy-out provisions. There should be an agreement that if a particular event occurs, such as a stock holder(s) starting a divorce proceeding, there is a mandatory sale of stock, so that the shares end up in the hands of only one spouse or in the hands of the family rather than the in-law. The provisions should set a mechanism to calculate the sale price and provide for the timing and method of payment.
3- Set safeguards for employment of in-laws. In an established family business, when adult children want their spouses to join the company, safeguards must be in place prior to employment. In-law employees must have the necessary qualifications for the job, have a clear job description, have benchmarks for performance and a set pay scale, and their employment must be terminable at will, in the sole discretion of the company.
4- Ensure that ownership stays in the family no matter what. The business owners must have an agreement restricting stock holding to family members. The succession of ownership should be set up so that in the event of marriage, divorce, death, disability, or retirement, ownership is kept within the bloodlines of the family.
5- Coordination with other legal protections. Corporate documents must be drafted so that they work seamlessly with estate planning documents and with pre-nuptial or post-nuptial agreements. To do that, corporate, trusts and estates, and matrimonial counsel should be in close communication.
Judith Bachman, Esq. Is the owner of The Bachman Law Firm, and has been counseling family businesses for over 25 years. For more information, go to www.TheBachmanLawFirm.com.