How an Owner's Agreement Can Help Your Family Business

Attorney Susan Dawson Discusses Family Business Agreements

Business Owners Agreement
Business Owners Agreement. Hero Images/Getty Images

How Can an Owner's Agreement Help My Family Business?

Attorney Susan Dawson discusses the use of owner agreements (corporate shareholder agreements, partnership agreements, LLC operating agreements) in family businesses.

When families go into business together, they frequently do not prepare agreements on the relationships in this family business. Because they are family, they assume there will never be problems they can’t resolve.

Unfortunately, this is not always true.

When a family business goes bad or when cracks begin to form in the relationship, the aftermath can be worse than with a straight business relationship. There is too much emotion involved. When family members enter the “business divorce” stage, they bring all the baggage of their family lives with them.

Susan says she has represented family members who spent tens of thousands of dollars fighting over a business operating at a loss, just because their emotions got in the way and they became unable to make logical business decisions.

For this reason, her top advice to family members getting into business together (or that already are) is to treat that person like you would a simple business partner - not as a family member. Do not assume that things would not go bad.

Understanding the Owner's Agreement 

That means you need a Shareholder Agreement (for a corporation), Partnership Agreement, or Operating Agreement (for an LLC).

It should be prepared by a neutral attorney without ties to any of the family members. The agreement should discuss things like:

  • When can one or more family members fire another family member? How can someone be bought out or removed from management? Notice the question is not can these things happen, but under what circumstances – e.g. negligent work performance or abuse of power, criminal activity, abuse of alcohol or illegal substances.
  • Can someone quit? If so, what happens to their ownership interest?
  • What happens in the event of a divorce? Not just when the business partners are married, but what if you go into business with your brother’s wife and she begins divorce proceedings against your brother. Do you still have to be partners with her?

Having a level headed plan in place will not stop the emotion, but it will prevent the emotion from getting in the way and potentially destroying the business in the process.

What about buy-out agreements?

Note: A buyout agreement or buy-sell agreement is also an important document that should be prepared at the formation of a family business. This agreement spells out what happens if one of the owners leaves the business. 

Susan Dawson is a partner with Waltz, Palmer & Dawson LLC in the Chicago area.