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Family Businesses: 3 Legal Safeguards

The last four years have seen a marked decrease in public opinion of large and faceless corporations, turning more and more consumers away from the big chains and toward smaller "mom and pop" businesses. Family businesses may be better equipped to weather a turbulent economy because they are supported by loyal relatives with a shared interest in the company's legacy, reports The New York Times.

On the other hand, conflicts within family can hit your hard work and investments where they hurt most. If you're planning to build a company that will stay in the family, here are some legal safeguards you should consider.

1. Prenuptial Agreements

Pros:

While not terribly romantic, signing a prenuptial agreement can establish which property belongs to which spouse in the event of a divorce. That includes any business ventures that you have built that you’d prefer to keep separate from your marital property and more importantly your ex-spouse.

Cons:

Excluding any family enterprise from marital property may cause problems if your spouse wants to participate and help grow your investment. Any future contributions by your spouse to that venture may be considered martial property.

2. Shareholder/Partnership Agreements

When family members come together to work on a new private venture, it is easy to forget about the basic division of the partnership or corporation.

Pros:

A shareholder agreement is like the business equivalent of a pre-nup, and it lays out in a clear manner what the roles and responsibilities of the partners will be.

Having this agreement on hand will help you avoid costly future litigation when one or more partners or shareholders chooses to leave the business or has concerns about its administration.

Cons:

Forcing family members to sign legal documents can easily spark distrust or arguments within the potential management of your new company. In addition, relatives may not be pleased that this agreement may be used in a lawsuit between family members.

3. Franchise Agreements

Your little “mom & pop” shop might grow large enough to start a “son” or “daughter” shop elsewhere, and a franchise might be a smart way to strengthen the family legacy.

Pros:

The new family franchise will benefit from the success and goodwill created by the popularity of its parent chain, making it perfect for expanding your business to relatives who are a part the brand.

A new franchise will also have the financial benefits of a proven, successful business and can rely on the franchisor for help with administration and marketing.

Cons:

Any franchisee has to pay fees in order to continue to operate as a part of the larger chain. Family members may not be as willing to comply with the terms of a franchise agreement if it limits their own part of the business in a substantial way.

Other Protections

While these three legal documents will start you on the road to protecting your family business, there are still other safeguards available to protect your interests in your investments. You should contact a small business attorney to discuss these options.

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