4 Legal Challenges Entrepreneurs Face When Scaling Family Businesses

As an entrepreneur, scaling your family business can be a rewarding indication that your operation is succeeding. And when you have your family surrounding you for support, it can feel like you have everything in place. But expanding your family business can come with legal considerations that make the process more challenging than you’d expect. From succession plans to ownership stakes, you’ll need to make some big decisions that won’t always be comfortable.

Read on to discover four legal challenges you should be aware of when scaling your family business.

1. Inheritance Disputes

What happens when the company’s founder passes away? If you don’t have a plan in place to determine how you’ll negotiate everything from operational procedures to inheritance money, you could be laying the groundwork for a family feud. Even normally peaceful families can erupt into disagreements when control and finances are involved.

You need to establish an estate plan with wills and trusts. Otherwise, you could find yourself in a sticky probate situation trying to figure out how assets should be distributed among your family members. This can derail business operations and tarnish your family’s reputation in the process.

It’s wise to consult with probate estate litigation attorneys in Pasadena. They’ll understand the nuances of business inheritance and help you determine an appropriate approach to asset division. As seasoned estate planning experts, they’ll know how to handle inheritance disputes and help you take the proper measures to avoid them in the first place. When everything is documented, it’s less likely that family grievances will govern the situation when it’s time to transfer operational responsibilities and money.

2. Succession Planning

When launching a small business that grows into a larger one, it’s essential to have a succession plan in place. Especially when multiple family members are involved, you don’t want there to be an intense and perhaps ugly competition for power among children, siblings, and others.

A succession plan will indicate who is taking the helm after the current leader. But the act of appointing someone new isn’t as easy as saying their name. Some companies have complex leadership structures, and leaders aren’t always owners of the company. As such, you’ll need to assign these roles carefully and even determine how hypothetical situations play out.

For instance, maybe the CEO you name turns out to be a poor match for the role. Or maybe they don’t want that role once the time comes. Use succession contracts to ensure everything is mapped out clearly and in writing. Don’t hesitate to update your plans, either, as family dynamics shift.

3. Shareholder Agreements to Clarify Business Decisions

Shareholder agreements are documents that outline shareholders’ rights and their relationship to the company. If your family business has partners from beyond the family tree, it’s particularly important to create shareholders’ agreements. These will indicate what each person involved owns within the company, as well as steps to take if one of those shareholders leaves.

Family businesses may initially rely on a sense of goodwill and trust to get their operations up and running. But as revenue increases and leadership responsibilities expand, you need formal documents specifying your governance plan and the rights of each shareholder. After all, common situations could spark conflict. A brother may decide he wants to sell his shares, or a couple may divorce. Knowing the next steps in advance can make navigating these situations less fraught for everyone.

4. Internal Trust Problems

What starts as a promising venture can start to fray as family businesses grow. You will need more professional assistance with key pieces of your operation, like marketing and accounting. If you had a sibling as your on-call graphic designer, you may need to upgrade to someone with more established skills in that area. Similarly, a nephew who knew enough to handle basic accounting may not have the financial acumen to handle bigger accounting scenarios. But you can’t assume that family members will be agreeable to role demotions or changes.

Turning to outside or more established professionals to fill roles in your company can cause rifts within your family. And, in some cases, those rifts can snowball into lawsuits and public grievances that fracture your family. It’s best to issue clear contracts and know how you’ll negotiate conflicts before they happen.

Be Strategic with Scaling

The last thing any entrepreneur wants to see is a family business that devolves into internal conflicts. The sense of ownership and shared responsibility may be what ignited your family business in the first place. But without clear succession and estate plans, it’s far too easy for internal warfare to take control.

Be mindful of your family dynamics and work with an experienced legal team to lay out your plans for the future. These actions can keep your business running smoothly and sidestep messy family entanglements.