Marilyn Bell, Head of the Family Department, and Chris Wilks, Head of the Corporate and Commercial department at SA Law, consider the risks of setting up a family business
It is often said that family businesses in the UK make up an important part of the country’s economy, with RJ Balson & Sons, a butcher’s shop in Dorset credited as being the country’s oldest surviving family business, established in 1515. There are a great number of reasons why family businesses are a fantastic venture – they usually have stability, loyalty and commitment running right through their core. However, there are a number of risks to consider when setting up a family business – specifically how to avoid a total breakdown of the business if a key relationship crumbles. Here’s what not to do:
- Don’t make your spouse a shareholder if they’re not involved
Often your company accountant will advise making a spouse, who may not be very involved in the business, a shareholder, as this provides tax benefits. However, this can make it very messy if the marriage breaks down. Far easier to pay the husband or wife a salary – leaving the business in the hands of the person actually in charge of the day-to-day running.
- Don’t dismiss planning for the worst
If you and your spouse both have an active role in the business it can make sense to make sure you’re both shareholders and in these instances a Shareholders Agreement (SHA) can be helpful. The SHA would include pre-emption provisions on share transfers; cover the situations where compulsory transfers could arise; and include a mechanism by which the shares could be valued. Importantly, if a marriage were to breakdown, and the business has other shareholders, a SHA can make sure that the shares of the departing spouse transfer to the person who is remaining in the business, rather than divided amongst all the shareholders. If this division were to happen, this would impact the balance of interests within the company.
- Don’t forget about partnership agreements
If the business is run by a husband and wife team as a partnership, then a Partnership Agreement should certainly be considered. Otherwise you run the risk of any break-up being governed by the archaic Partnership Act of 1890, which allows either partner to dissolve the partnership without the agreement of the other.
- Don’t dismiss how children impact a business
In many cases, once a couple’s children grow up, they will follow their parents into the family business and be given a shareholding. However, think carefully about how a divorce could impact this dynamic. You may find that a child will naturally take sides if their parents break up and they may then have a majority shareholding and associated control within the business.
- Don’t let a handshake seal the deal
It’s very common for couples to promise their offspring a stake in the family business or even a long-serving employee – offering a certain percentage interest if the business is sold. Not having proper documentation of these agreements can create further headaches if a couple divorce. For example, an employee with a stake in the business could be on murky legal ground if their position isn’t properly supported with legally binding documentation – meaning loyal members of staff could be lost if a family business is in the midst of being carved up due to a divorce.