4 Potentially Fatal Mistakes Your Family Business Needs to Avoid

Anyone involved in a family business knows it has its pleasures and its pitfalls – but incurring these four potentially fatal legal mistakes can prove deadly to your family business:

Mixing family and business finances. Unfortunately, we live in a litigious society, so as soon as a family business is up and running, it’s important to shelter it in a formal legal entity like a corporation or limited liability company, which will protect the personal assets of investors/owners (i.e., family members) from business liabilities. Without that protection, everyone’s bank account is vulnerable if something goes wrong with the business.

No license. Many businesses, even those that are home-based, require a local, state or federal license to operate. Without that, you can face stiff fines or even be shut down. Your city hall or county government office can tell you what is necessary to operate your business legally in your area.

No employment agreements. Unless you want employment in your family business to be a birthright, you need to have employment agreements that spell out – in writing – what the expectations are for the job each family member is doing and how they will be compensated, as well as termination guidelines. If there comes a time when you have to fire a relative, having a written agreement on hand to refer back to can help keep things civil.

No succession plan. You really shouldn’t start a business without an end goal in mind, be it a way to furnish employment for family members through the generations or something to build, turn, and sell to feather a retirement nest. And what happens if the person who started it all suddenly wants to cash out, falls ill or dies? If you want your business to go on without you, a succession plan that spells out how this will be accomplished is crucial.