5 Ways to Prevent Family Business Lawsuits

Imagine you’re at the Thanksgiving dinner table with those you love the most—your family. Before you know it, someone asks, “Who did you vote for?” Next thing you know, World War III breaks out.

Now imagine these same people being the shareholders and employees in your family business. If they cannot peacefully discuss the qualifications of two political candidates, how will they agree on the joint management of their financial affairs?

Here are the top five observations, from someone who has litigated many intra-family disputes, about what can prevent nasty and expensive family business lawsuits:

  1. Sign a contract
    Should you really sign a contract with your brother about the maintenance of a family business? Of course you should. Many times, family members’ views about how to run the business are very different. If the business simply begins without written agreements, it’s very likely that chaos ensues in the future. Thus, this basic point — the execution of a contract — is a fundamental component when establishing a family business.
  2. Establish a hierarchy
    Someone has to be the boss. Generally, it is wise to choose the person with the most business experience, the best education, and the most obvious leadership skills. In any family, the appropriate candidate should be obvious. If the parties cannot agree on this, it is generally a bad sign.
  3. Treat the family business like a real business
    Family businesses should conduct regular meetings where notes are taken, minutes are kept, and tasks are assigned. In fact, an easy way to judge the potential success of your family business is by observing how easy it is to apportion tasks among family members after events, such as dinner. Who will wash the dishes? Who will clean the tables? If this process goes smoothly, there is a greater likelihood that the family business has a chance of success.
  4. Utilize written job descriptions
    The family business is an opportunity for the perennial loser to flex his/her muscles and establish a new beachhead, a place where his/her opinion is heard and obeyed. The problem is that it is only sometimes that the person who is espousing an opinion actually has the expertise to do so. Maintaining written job descriptions creates necessary boundaries and ensures that only those people with a particular expertise handle particular areas.
  5. Maintain performance measurements
    After Cousin Johnny joins the family business, his performance must be measured like any other employee’s. Here’s why: If he’s given preferential treatment, there will be resentment by other family members and by other employees, which causes turmoil. When conducting these reviews, make sure they occur at least once a year, and all notes are kept in a personnel file. This prevents problems in the future if he is removed from the family business and decides to sue.

If you find yourself entangled in a nasty dispute with your family members over the family business, and you feel you may need some legal assistance, we recommend you contact one of our Miami family law attorneys.