Thinking of Starting a Business with a Family Member? Watch Out for These 5 Dangers
Starting a business requires careful planning and strategic preparation, but hard work alone isn’t always enough. Sometimes you need to lean on a system of support. Whether it’s borrowing capital from Mom and Dad or partnering up with a sibling, entrepreneurs and seasoned professionals alike often turn to those they trust when launching a new venture – and who better to trust than family, right?
Unfortunately, as many can attest, going into business with a family member, or even a close friend, can end badly for even the most strongly bonded tribes. As attorneys who handle disputes between business owners, partners, and shareholders throughout Texas, our team at Hendershot, Cowart & Hisey, P.C. is all too aware of common conflicts and pitfalls that can put relatives’ personal and professional ties at risk.
Business & Family Members: Common Problems
Because starting a business with family creates personal, professional, and financial risks, it’s important to understand what potential problems commonly arise, whether you have the tolerance to take those risks on, and what you can do to minimize and avoid disputes and litigation as much as possible.
A few of the most common problems family members face when considering or starting a business include:
- Underestimating the financial risks – Starting a new business can be an exhilarating experience, and one that creates strong feels of hope and future prosperity. Unfortunately, many business owners and their family members fail to fully appreciate the risks associated with starting a business. Those risks aren’t glamorous: about 50% of businesses fail within the first 5 years, and roughly 66% within the first 10 years. While savvy and sensible people may be deterred by those risks in other contexts, they don’t always give them the same consideration when they involve a family member. That may speak to the faith family members have in one another, as well as the hopefulness and desire to help. However, it doesn’t change the real financial risks, and the repercussions of those risks should the business become another statistic.
- Insufficient documentation – You trust your brother and sister, and you know your son or daughter will pay you back, so there’s no need for all the formalities. That’s an all-too-common way of thinking for family business partners, and it can make for a ticking time bomb. Trust is simply not a substitute for clear, carefully crafted, and enforceable agreements, not only to ensure a consistent vision for the business itself, but also to protect the rights and interests of the partners or shareholders involved. Regretting not having drafted partnership agreements, operating agreements, and other critical contracts or documentation is something many family members in a new business end up regretting.
- Failing to understand legal duties – Family members who get involved in a loved one’s start-up all too often fail to understand the legal duties they must uphold, and how they might arise. In Texas, our laws function under the assumption that partners who enter into a new business do so at arm’s length, meaning they’re aware of their need to protect their own interests. Partnerships don’t generally subject parties to special obligations, just the agreements they’ve made and the fiduciary duties they owe each other after the partnership is formed, which are much more limited in LLCs, limited partnerships, and smaller corporations, and non-existent in borrower-lender relationships. It doesn’t really work that way with family members, though, as there is a legal assumption that family members (and in some cases close friends), are part of a relationship of confidence and trust. In those types of relationships, Texas law imposes stringent duties of loyalty and good faith. This means family member business partners have obligations to make full disclosure, place the interests of their partners above their own, and have the right to set aside unfair transactions between fiduciaries if they aren’t fair – for which the burden of proof will often fall upon the defendant.
- Minimizing the risks of personal issues – Personal conflicts crop up in the hierarchies of even the most powerful corporations, and they can put a lot on the line. They also become magnified and even more intrusive in businesses helmed or supported by family members. From long-standing resentments to disloyalty and jealousy, family baggage can become one of the biggest points of conflict, and a source of dysfunction that radiates throughout a business.
- Thinking disputes will be easy to resolve – Business owner disputes are difficult no matter who those business owners are, but if they’re relatives, you can be sure the abundance of extra baggage doesn’t always help. Though some family partners enter into a business relationship thinking they’ll be able to smooth things over should an issue arise, the reality is that partnership disputes can exacerbate and intensify emotional reactions, and potentially harm not only professional relationships, but family bonds as well. To save headache and heartache down the road, it’s best to have mechanisms in place before these problems arises. These legal protections can be tailored to your unique situation with the help of a lawyer, and may include partnership / shareholder agreements, buy-sell agreements, and other important contracts and governing documents established early on.
Texas Business Lawyers: Counsel & Representation Focused on Your Future
Hendershot, Cowart & Hisey, P.C. attorneys are industry leaders in business, health, and family law. We know the complexities of legal matters involving families, not only in the context of divorce and family law, but also when it comes to business ventures and complex litigation. By leveraging our multi-disciplinary approach and 130+ years of collective experience, we provide the counsel and representation clients need to address a range of issues while prioritizing their rights and interests. That includes proactive and responsive assistance for matters such as:
- Business formation and entity selection
- Drafting partnership and shareholder agreements
- Buy-sell agreements and contract drafting
- Intellectual property protection
- Contractual disputes
- Business owner disputes
- Shareholder oppression
- Fraud and misrepresentation
Speak with a Houston business lawyer by calling (713) 909-7323 or contacting us online. Hendershot, Cowart & Hisey, P.C. serves clients in a range of industries throughout Texas.