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.
Family businesses are commonly structured as a limited liability company or a partnership, although, other structures are available depending on the need of the business. We discuss all possible structures to help you choose how to structure your family business.
The advantages and disadvantages of a family business
Before considering the different models, examining the advantages and disadvantages of setting up a family business can be very beneficial for your business.
What are the advantages of a family business?
The benefits of running a family business are numerous, including:
Stability – because the business managers tend to be family members who stay in their positions for many years. This provides investors, suppliers, and consumers confidence that a new director won’t suddenly come on board and make disruptive changes.
Flexibility – the people operating a family business often take on multiple roles and can move quickly if an order needs fulfilment at short notice.
Also, it can be the case that the overall strategy of the business needs to change in response to market forces such as economic upswings and downturns.
Commitment – in many cases, the profits from a family business tend to go towards supporting family members. This creates a deep commitment and ambition to achieve success.
Customer/community focus – family businesses are often set up in response to not only a gap in the market but also the founders’ desire to deliver better service than what consumers are currently offered.
In addition, because family businesses operate within the community, they’re driven to invest in local suppliers and support community interests
What are the disadvantages of a family business?
Of course, there are disadvantages, including:
Family conflict – the old saying “you can’t choose your family” is 100% true in the case of family businesses.
Close emotional ties between members can make conflicts hard to resolve. Below we discuss how to avoid and manage family business disputes
Lack of structure – it's easy to allow family businesses to drift along without a clear strategy and for people’s roles to lack definition. This can lead to the company getting into financial trouble if there is an unexpected downturn.
Succession planning – if you want to keep the business in the family, there must be at least one family member who wants to manage the organisation after you retire.
Proper, well-thought-out succession planning is essential to running a successful family business.
How do I protect a family business from conflicts?
Prevention is far better than cure when it comes to family business conflicts. Make sure you have standard documents such as a Shareholders’ Agreement or a Partnership Agreement (depending on how your business is structured) in place.
It's also vital that family members have clearly defined roles and job descriptions and that a dispute resolution process is included in the Articles of Association or another governing document that can be easily accessed and viewed.
Family business structures
Although there are hybrids, in most cases, most family businesses adopt one of the five structures that we’ll explain in this blog.
1. 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.
The partnership model means two or more people make decisions and divide the profits.
If you choose this model, it's 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.
3. Distributed model
If a Partnership Agreement isn’t 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 contributing to the business’s success are justly rewarded.
4. 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.
5. Public model
The public model is where part of the business is publicly traded, or the family runs the business like a public company.
A management team is appointed, and the business owners play a minimal role. This model works well when family members are not interested in running the business, and the challenge for the family owners is to keep control of the organisation.
Get legal assistance from LawBite
When choosing the right structure for your family business, consideration must be given to several key factors, such as the interest of certain family members in the company, the skills and experience available and the emotional element of relationships between family members.
The best way to ensure the right structure is selected and the required agreements are in place to ensure the chosen model is successful is to get advice from an experienced commercial solicitor.