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Six Mistakes to Avoid When Running the Family Business
A family-owned and family-run business in San Diego should be treated as seriously as any other business. In San Diego County, California, there are six mistakes to avoid when running your family business.
Failure to Get Permits, Licenses, and Registrations for Family Business
As we recently discussed here, California businesses need a long list of permits, licenses and registrations to conduct business. Many family businesses skimp and skip on their permits. Do not do it. A talented and trusted business attorney can help with these statutory requirements. Do not be shut down by government regulators because you do not have the proper paperwork. A short version of the list:
- Local Licenses, Permits, or Registrations: License/permit for a bar, gaming facility, outdoor customer area, etc.
- Special Licenses: Professionals but also businesses like hairdressers, pest control, funeral homes, dry-cleaners, etc.
- FEIN: Federal Employer Identification Number — this is essential for all businesses — see IRS SS-4
- SEIN: Your Coronado family-run business will need a California Employer Payroll Tax Number if you have even one employee, even if that employee is a member of the family
- California Seller’s Permit: Your National City family-run business must obtain a California seller’s permit from the California State Board of Equalization if you are selling products
- California Use Tax Account: Under many circumstances, your family business must pay California use tax on purchases from retailers outside California
- Special Taxes, Fees, Licenses and Permits: Sellers of cigarettes, alcohol, tires, etc. See here.
Failure to Have Ownership and Employment Agreements in Family Business
When the family is happy and getting along, that is time to sit down with Grandpa, Dad, and Aunt Maria and hammer out details of ownership, duties, responsibilities, and expectations. Honestly, no good business or corporate lawyer would advise against getting everything in writing, even if the “writing” is simple and hand-written on a sheet of notepaper. Here are a number of important issues to get in writing:
- Ownership: Who owns the business — yes, “the family,” but which family members precisely?
- Management: Who is running the business​?
- Succession: Who takes over if there is a death or disability?
- Profits: How profits are distributed?
- Losses and capital contributions: If family members are receiving profit shares, what are they contributing if capital contributions are needed?
- Duties and responsibilities: Who in the family is doing what?
- Adding family: Are we welcoming, and in what way, Cousin Vinny’s new wife to the business?
- Confidentiality: Even a family-owned and run business has information that should be kept confidential — employment agreements should impose a duty of confidentiality
- Protection of trade secrets and other proprietary information: Same as above
- Duty of Loyalty: If a family member is working for the family business, then the family owes a duty to loyalty not to divert business opportunities, not to self-deal, not to waste company assets, not to convert company assets to personal use, etc.
- Compensation: What is everyone being paid?
- Reimbursement policies: What are the reimbursements policies?
- Post-employment obligations: If a family member leaves the business, what is expected?
- Divorce: How does the business handle divorce? Cousin Vinny’s wife wants half!
- Buy-outs: How are these handled? Mandatory? Discretionary?
- Expulsion: How can troublesome family members be expelled from the family business?
Failure to Incorporate Family Business and Protect Family Assets
One of the most common mistakes is the failure to incorporate. If you do not form a legal entity like corporation or a limited liability company, you are putting all of the family’s assets at risk. You need the corporate shield.
Aside from that, as we recently discussed, using a formal corporate structure provides:
- Status and credibility
- Perpetual existence and transferability
- Tax advantages
- Expensing flexibilities
Failure to Have a Family Business Succession Plan
Often, family businesses fail to plan for adversity in the event of an unexpected death or disability. Often, the family is just avoiding unpleasant and angry confrontations. However, it is essential. As mentioned above, this is easily handled as part of the ownership agreements and/or employment agreements. It can be as simple as the family designates someone as “Vice-President” or “Vice Chief Executive Officer.” The last thing your family wants is to be arguing this in a hospital waiting room.
Succession planning is also important in dealing with licensed business. Who in the family has the necessary licensure? If no one, then it might be useful to identify a professional who might be interested in purchasing the business.
Failure to Use the Family Business for Effective Estate Planning
Family-run businesses are effective tools for estate planning, avoiding so-called “death taxes” and minimizing gift taxes. Many family businesses fail to capitalize on these advantages. One of the most important possibilities is passing assets to younger members of the family while such assets are “locked up” in the business. As such, those assets do not end up being “wasted.”
Failure to Hire Skilled Legal Counsel Like San Diego Corporate Law
Finally, many family-run businesses make the mistake of thinking they do not need the assistance of skilled legal counsel. That is far from the truth. A good and trusted lawyer can help your business succeed. For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to draft ownership and employment agreements and can help with the other specific and unique needs of your family-owned business. Contact Mr. Leonard by email or by calling (858) 483-9200.
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