Welcome back to another week of the Small Business Legal Playbook! Play 9 is titled “The Dreaded Coin-Flip.” All fans in the NFL dread the coin-flip, especially in over-time. If your team calls the flip correctly, it can be the difference between winning and losing.
We spoke last week about the unique issues family owned small businesses face, in terms of external issues. Well what about the unique internal issues a family owned small business might face, especially when you start your small business.
So how should you organize your family owned small business to maximize the chances of success? Since these are more proactive measures, we’ll concentrate on the offensive strategies for this Play. If you’ve already started your family owned small business, consider sitting down with your business partners and discuss incorporating these potential options.
First, you must accept that running a family-owned small business should be no different than running a business where your business partners, workers, and vendors, are not members of your family. That means treating the business like any other investment: you must protect your investment and know exactly what the rules of operating the business will be. A well-drafted operating agreement or set of corporate by-laws, depending on what type of corporation you’re intending to form, can satisfy both objectives. Whichever agreement is appropriate, make sure it clearly defines what your investment is, what your rights in the business are, and how you can buy a partner out or sell your interest in the company. Family owned or not, a business is always hampered by unclear language that doesn’t clearly define what decisions the owners can make. It should be clear to everyone investing in the business which people get to make the decisions that affect the business: hiring or firing workers, determining the amount and/or frequency of distributions to investors, etc. It should also be clear to everyone how decisions of that nature are made, whether it requires unanimous support or a certain percentage.
The one situation you must avoid, is a situation where you and your business partner own the business 50-50. I advise my clients that this is a dreaded “Coin Flip” situation and must be avoided at all costs. A stalemate, where the owners of the business cannot agree on a course of action, but neither side has the power to make the decision must be avoided at all costs. A stalemate will make it impossible for your business to function. So, make sure there is language in place that has a clearly defined process for resolving internal disputes, such as giving one of the business owners the final say in some matters, and another business owner final say in others, or giving final say to a neutral third party. Family or not, refusing to treat it like a business will only lead to problems in the future.
That’s all for this week. I hope you enjoyed this week’s Play, and stay tuned for next week’s play from the Small Business Legal Playbook! Remember to subscribe and get each play sent to you directly! Until then, may your businesses continue to thrive and your football teams be victorious. Keep playing to win!