Estrella Legal Alert – Organizing Your Family Business as a Corporation or Limited Liability Company
Many business owners decide to operate as a traditional corporation or a limited liability company to reduce personal risk, optimize tax management or secure capital from investors. In the case of a family run business, it is a natural step in the growth of the business from a D/B/A to secure long-term performance beyond founding members. The main problem we see is that after creating the legal entity and doing all the filings required, management lacks the know-how and consistency in corporate governance to optimize the benefits of a corporate structure.
Effective corporate governance should enable transparency, accountability, and ethical behavior within the organization, providing a stronger model to achieve long-term goals. Here are some key basics of corporate governance for small family businesses:
- Board of Directors: Even in a small family business, it’s advisable to have a board of directors. The board can include family members, as well as independent directors with expertise in relevant areas. The board’s role is to provide guidance, make strategic decisions, and oversee management. Directors should understand their fiduciary duties and responsibilities with the entity.
- Separation of Ownership and Management: It’s important to distinguish between the ownership of the business and its day-to-day management. While family members may own the business, professional management may be necessary to ensure efficiency and effectiveness. Certain decisions could require board approval providing a check point for capital investments, large expenses or long commitments.
- Clear Roles and Responsibilities: Define the roles and responsibilities of family members within the business. This includes specifying who will be involved in management, decision-making, and succession planning. As a business grows, the “jack of all trades” role is less effective.
- Transparency: Maintain transparency in financial reporting and decision-making processes. Share financial statements and other important information with shareholders and stakeholders.
- Conflict Resolution: Establish a clear process for resolving conflicts within the family and the business. Conflicts are common in family businesses, and having a structured approach to addressing them can prevent disputes from harming the business.
- Succession & Ownership: Plan for the future by identifying potential successors and providing them with the necessary training and experience. The succession plan should be based on merit and qualifications rather than solely on family ties. By-laws should address changes in ownership due to retirement, death, divorces, or other situations where ownership would be transferred.
- Code of Conduct and Ethics: Develop a code of conduct or ethics policy that outlines the values and principles that guide the business. Encourage adherence to these standards by all employees, including family members.
- Regular Meetings: Hold regular meetings of the board, shareholders, and family members involved in the business. These meetings can facilitate communication, decision-making, and accountability.
- External Advisors: Consider seeking advice from external professionals such as lawyers, accountants, and consultants. They can provide objective guidance and ensure compliance with legal and regulatory requirements.
- Compliance: Stay informed about relevant laws and regulations, including tax, employment, and industry-specific regulations. Compliance is crucial to avoid legal issues that can harm the business.
Seeking professional advice and consulting with experts in family business governance can be valuable for tailoring these principles to your unique situation. Our Commercial and Corporate Practice at Estrella LLC can assist you to develop proper corporate governance to drive your business towards successful growth.
