What Thomas Jefferson Might Say About Your Business Arrangements (Part 3 re family business)

March 18, 2016 - Posted by: admin - In category:

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Family business is not the exception to the rule.  Rather, the rule is all the more applicable and important when it comes to family business.

This is part 3 in a series of posts on the importance of written contracts to serve as the governing foundation for business relationships. We started with the premise that one reason why the Declaration of Independence was so valuable, power and durable was due to the fact that it was written, not just declared.  We next addressed the obvious and common-sense nature of these things noted that notwithstanding how simple and obvious, there are far too many business owners who are using inadequate “handshake deals” as the foundation for their commercial ventures. This, notwithstanding the fact that many such individuals have taken steps in many other areas to safeguard their property.  Let’s now consider the common belief that when it comes to business relationships among close friends and family members, formal legal agreements are not needed. Though commonly held, this idea is almost always false and can lead to amazingly awful outcomes.

Please consider this analogy. You are participating in a car-pool to take local neighborhood children (including your own child) to school. As you drive around the neighborhood loading up children, you would of course make sure that each child buckled up his/her seat-belt upon entry into your vehicle and prior to driving away to the next stop along the trip. While being very conscientious about neighbor children, would you let your own child to neglect wearing a seat-belt? Of course not. You would be just as concerned about the safety of your own child.

Since written contracts, customized for your facts and circumstance (as well as for the persons involved), can serve as significant protections against future problems and potential harm, why would you ever care more about providing and receiving such protections when dealing with strangers but not in the context of close friends or family members? Please remember that the protections about which we are speaking are muti-directional and have broad application.  In other words, you are not only protecting yourself, you are also protecting other persons (i.e. child or sibling) from your action or inaction (including honest mistakes). In addition, you are protecting everyone from events totally outside your control.

Consider the following hypothetical scenario related this last point:

Perhaps you, as the owner of a family business, have an “understanding” with your spouse and children as to how ownership and control of such business will function now and in the future. Maybe you have even been careful enough to have “the talk” with your family members to carefully specify what you wish to happen in the event something were to happen to you.  Your spouse and children have always been very good listeners and respective of your wishes, so you feel comfortable that if the time comes, all will go according to plan. Then, you get in a car accident on the way home from work tomorrow and end up in a coma at the local hospital (not a happy thought, but worth considering for a moment).  Since you have no written agreements in place about your business ownership and operations, as well as needing to worry about your medical care, your family now is in something of a pickle when it comes to your business.

  • Who has legal authority to use the business bank accounts to pay bills, order products and pay you employees?
  • Who can make decisions about hiring and firing and other day-to-day business operations matters?
  • When the bank contacts you about needed changes to you business line of credit, who is authorized to speak for your company and deal with the bank and other persons and entities on behalf of your business?
  • Assuming the worst and you eventually pass away, how will ownership of you company be handled in the short and long-term?

While the scenario above does in fact represent a worst-case situation, please remember that auto accidents happen every day in every town. Also, whether or not the worst happens, the facts above highlight the reality that when it comes to dealing with your family business, real-life considerations relevant for non-family businesses are likewise important. Put another way, even if everything is and remains ideal with your family relationships, because you have a business enterprise, you must consider the reality that non-family members are relevant in all aspects of you business.  You are dealing with much more than just family.

Said another way, such non-family members are likely outside of your “circle of trust” and otherwise, they will not feel nearly as inclined to honor your “family understanding”.  Just focus on your bank and your vendors.  None of those entities are going to much care much what you and your family have agreed over dinner. Rather, they will look for and require valid legal documentation to show who is authorized to act on behalf of your company, when and how such actions can come into play, etc.  Without proper legal papers, it may very well be the case that your family members are unable to carry on with the business after you disability or death.  Further, even if your family is able to push forward and run the business when you are no longer in the picture, if they are relying solely on their memory of what you instructed long ago, you have little reason to be confident that what they heard from you mouth originally, how they understood such instructions and how such are remembered and executed today will be consistent with you intentions.  This is not because your family is devious or bad intentioned.  Rather, it is because they are human.

Is this parade of horribles magically solved by a written contract? Don’t be silly–there is nothing magical about writing things down. ? However, magic or not, written contracts are very useful to solve many of the potential problems noted above. There are many good reasons why law libraries, courts and the legal world generally revolve around the written word.

To circle back to the beginning of this theme, Thomas Jefferson knew exactly what he was doing when he wrote the Declaration of Independence. Learn from one of the keenest intellects ever to walk the earth and make sure that you have written agreements to govern your business, including and especially your family business.

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