• Startups
  • January 27, 2022

How to structure a family business

Family businesses have been the mainstay of the UK economy for centuries. However, given the emotional relationships involved, clearly setting out who owns a family business can be tricky.

One of the most common questions is: who owns the family business? Creating an effective family business ownership will help you avoid issues in the future.

Although there are hybrids, in most cases, most family businesses adopt one of the five models that we will explain in this blog.

  • Owner-operator model

The simplest of the five, the owner-operator model can carry on successfully for generations. Control of the company rests with a single person or couple and regular succession planning exercises ensure proprietorship is handed over successfully and fairly when one owner-operator retires.

  • Partnership

The partnership model means two or more people make decisions and divide the profits. If you choose this model it is crucial to draw up a Partnership Agreement that sets out the rights and responsibilities of each partner, how decisions will be made and deadlocks resolved, what happens if a partner wishes to resign, and a disputes resolution procedure.

  • Distributed model

If a Partnership Agreement is not drawn up, disagreements can lead to the business imploding and years of arduous work being destroyed. The distributed model avoids this by passing ownership of the company down to descendants, whether or not they work in the business. The distributed model also allows all children to inherit; however, a compensation scheme can be implemented to ensure those who are contributing to the business’s success are justly rewarded.

  • Nested model

Under the nested model, family members own some business assets separately and some jointly. The family runs the core business as a profit-making entity, distributing profits to the various family branches (for example siblings and their spouses), who use the capital to create their own business portfolios. Again, a comprehensive agreement is necessary to ensure the core business gets the attention it needs to grow and is not left underfunded.

  • Public model

The public model is where part of the business is publicly traded or the family runs the business in the manner of a public company even though it remains private. A management team is appointed, and the owners play a minimal role, usually confined to electing Board members. This model works well in situations where no family member is interested in running the business. The challenge for the family owners is keeping control of the organisation when they play little or no part in the decision-making.

Final words

When choosing the right structure for your family business, consideration must be given to several key factors such as the interest taken by certain family members in the business, the skills and experience available, and how well everyone gets along. The best way to ensure the right structure is selected and the required agreements are in place to ensure the chosen model is a success is to get advice from an experienced Commercial Solicitor. 

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Additional useful information

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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