"The Family Business Legal
Group is Launched"

Should my business be a corporation, a partnership, or a limited liability company?
Deciding which of these legal structures is most appropriate for your family-owned business requires careful consideration of issues concerning liability protection, tax planning, and company management. For instance, a well-planned legal structure is critical to insulating the family's members and assets against a wide variety of claims and lawsuits, some of which may not be easily covered by insurance. Deciding whether to operate as a corporation, limited liability company, or partnership is critical to reducing your personal taxes in a variety of contexts ranging from start-up losses, to ongoing income, to gain from the future sale of the business. Careful planning of the entity is also important to creating and maintaining a sound management structure. So, your business should be thoughtfully structured with the advice of an attorney experienced in representing family-owned businesses.

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Do we need a written agreement among ourselves, as owners of the business?
A well-designed agreement among the owners of a corporation, partnership or limited liability company can avoid future disputes over ownership and control of the family-owned business. For example, it can restrict sales of equity interests to outsiders, and even to other family members, maintaining the desired ownership structure. The agreement can provide for any special voting and control rights desired by family members. It can provide "drag along" and "come along" rights, allowing a future sale of the company (including interests of minority owners who would otherwise rather not sell) by consensus of the controlling family members. This agreement can also plan the buyout of a deceased family member, with or without life insurance proceeds, providing the grieving spouse and children with critical financial support. In short, such an agreement plays a critical role in structuring the ownership and management of the business. For a more detailed discussion, see "All in the Family".

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What can we do to ensure that ownership of the business remains completely within the family, even after the death, divorce or bankruptcy of a family member?
A written agreement is particularly important to avoid a dramatic change in the family's exclusive ownership of its business as a result of events outside of the family’s control. For instance, absent such an agreement, if one of the family owners divorces, a hostile ex-spouse may be joining family members at the ownership table, demanding an unexpected and unaffordable buy-out arrangement. Also, the personal bankruptcy of a family owner (or the bankruptcy of the spouse of a family member) could leave that member’s creditors with a claim against his or her equity stake in the family business. And, if a family member dies prematurely, the grieving spouse and children may be left with an illiquid, unwanted stake in the business, instead of much-needed cash. For a more detailed discussion, see "All in the Family".

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Why should we consult with our family business lawyer before negotiating a non-binding letter of intent, or the basic terms of a lease, credit facility, strategic alliance or other significant transaction?
Entrepreneurial clients often ask their attorney to "document" a set of terms already agreed to in principle with a lender, landlord, strategic partner or other commercial party. If the experienced attorney then points out contract, tax or other important issues the client has not recognized, it may be very difficult to re-open negotiations on these points. The result frequently is that the client may be forced to swallow hard and accept a deal less attractive than he or she could have negotiated with expert advice at the beginning.

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What should we do to protect and exploit the trademarks, copyrights and trade secrets of our family-owned business? Before you begin branding your goods or services under a chosen name or logo, you should receive legal advice on whether potentially conflicting trademarks already exist, the likelihood that your mark will be accepted for registration by the U.S. Trademark Office, and what general scope of protection you can expect from registration. If you have original materials created for your business, such as software programs or fashion designs, an experienced attorney can advise you on what copyright protection may be available. Your attorney also will help you secure your trademarks, copyrights and trade secrets against infringing users, and defend your company against competitors claiming infringement. An experienced licensing attorney will help you negotiate the rights you may need from other parties, and help you license others to use your valuable rights where appropriate.

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What kind of legal advice may help us avoid exposure to employee lawsuits?
Any business owner must carefully tread through the ever-changing minefield of employment laws and regulations. Family-owned businesses must be particularly careful in fairly applying sound human relations policies to both family and non-family employees. For example, condoning questionable behavior by a family member may create legal exposure, which may be further escalated if a non-family employee is disciplined for similar conduct. And allowing family members to act by a different set of rules will, at the very least, create resentment in your workplace. Developing and enforcing a clear set of written policies, generally in an Employee Handbook supplemented by updates or modifications to reflect current law, can help you avoid such problems. The assistance of an experienced employment lawyer is essential to creating and updating your policies in compliance with all the applicable legal rules.

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What issues can an experienced leasing attorney alert us to and help us negotiate with a landlord?
Finding the right location at the right price and on the right terms is an important challenge to the owners of a family business. Landlords will typically be represented by experienced brokers and legal counsel, and will present their prospective tenant with a detailed and landlord-favored lease form. While market conditions often determine how flexible a landlord may be in negotiating, your prospect of reaching the best available terms depends on your advance understanding of likely key issues. You should seek the advice of an attorney experienced in negotiating leases before commencing discussions with a landlord. Among the most common issues you may face are: (a) will rent be on a "triple net" basis or "gross rental" basis, or something in between? (b) Will there be any renewal options after the initial lease term and, if so, on what terms? (c) What "common area" expenses will you be responsible for? (d) Will there be any "free rent" or tenant improvements allowance? (e) Will you have any option for additional space if you initially lease only a part of the premises and later need more space? (f) Will the lease contain any provisions which will change if other tenants nearby fail or depart? and (g) Is the landlord requiring one or more family members to personally guarantee the lease obligations and, if so, can you negotiate some "cap" to this exposure? For a more detailed discussion, see "Lessee Beware- Some Issues to Prepare For".

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What sorts of issues can an experienced finance attorney advise us on and help us negotiate with a prospective lender? Access to working capital funds needed for the operation and growth of your family-owned business can be vital to its success. A common source of such funds is a working capital facility from a commercial bank serving entrepreneurial businesses. Such banks will have some differences in the terms they offer or find acceptable, but typically will have a fairly standardized set of working capital loan documents and terms. Your ability to negotiate better terms with the lender will be enhanced by understanding and anticipating the lender's positions on key issues such as: (a) How large a borrowing facility will the lender likely offer, given the nature, track record and assets of your business? (b) What finance charges, interest rate and other items will this lender charge? (c) What financial ratios and other performance criteria will the lender impose, and what level of performance could trigger a default? (d) What affirmative and negative covenants is the lender likely to require of the borrower? and (e) Will the lender require personal guarantees (or "hard collateral"), in addition to a first priority lien on the assets of the business? Also, does the nature of your business make available other types of financing, such as factoring or other accounts receivable financing?

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What important estate planning issues should be addressed before the death of a family business founder?
Among the important planning considerations are: (1) anticipated needs of the surviving spouse; (2) potential liquidity issues if the business remains in the founder’s taxable estate; (3) who should serve as Successor Trustees to hold the founder’s ownership equity in the business; (4) coordination of shareholder restriction agreements with the founder’s estate planning documents; (5) disposition of the business' real estate (if the beneficiaries receiving the business real estate will be different from those receiving the business); (6) a contingency plan in case the founder becomes incapacitated; and (7) estate tax valuation discounts for the founder’s equity ownership.

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How can the business founder provide fairly for both the children who inherit the successful family business and those who do not?
Any family whose net worth is tied up significantly in a family business must confront not only the issues of management transition, but also the possibly devastating estate tax burden resulting from inclusion of this equity ownership in the founder's taxable estate. For example, a simple estate plan might give all the founder's equity to Children A and B, who participate in the business, while granting the residue of the estate to Children C and D, who do not participate in the business. Unless the estate planning documents are properly drafted, the residue of the estate due to go to C and D may be hit with the entire estate tax liability, leaving the two sets of children with quite different net proceeds, unlike what the founder likely intended.

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What if the founder's children are unlikely to continue in the business after the founder's death?
All businesses endure cycles. Founders of family businesses don’t always die at a time when selling the business could achieve its greatest value. A construction business, for example, may sell for a much higher price during a housing boom. If the next generation is unlikely to step into the business, family leaders should recognize this and plan in advance for a successful exit transaction so that the family can receive the full value which has been built over the years.

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Should adult children participate in the business founder's estate planning?
In so many facets of life, open communication can often prevent personal conflict. While our natural tendency is to avoid the discomfort of speaking to our children about our estate and transition plan, leaving these issues for after-death discovery often results in disappointment, lifelong resentment and family fragmentation. Discussing your plans openly with your children allows you to share the reasons for your choices, hear their reactions, and even adjust your plans to foster greater harmony in your family.

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