Essential legal matters to secure the future of a family business
Annette O’Sullivan, solicitor with Walsh & Partners Solicitors in Cork, says: "A family business should have an annual review with the solicitor for the family. The solicitor should notify the owners when laws and regulations change."
The Caveat “fail to prepare, prepare to fail” could not be more relevant than for anyone creating a family business, advises a leading Cork-based solicitor.
Annette O’Sullivan, solicitor, with Walsh & Partners Solicitors in Cork, advises that a lot of legal groundwork is needed when embarking on the exciting journey of setting up a family business or growing/changing the direction of an existing one.
"An experienced solicitor will listen to the wishes of the family members and provide guidance and impartial advice," says Annette. "This leads to well-drafted agreements which prevent disputes inside and outside the family business."
Independent legal advice for each business member is essential. For example, a parent wants to pass the family business to his children but wants a provision for an annual income and medical/ nursing home costs. Getting the business may seem wonderful. However, the recipients must weigh up the benefits and liabilities. If the parent were to live into their 90’s the annual payout to them may prove very costly in the long run. The business may not be worth a lot and the business may become obsolete. Caution is advised here.
It is never too late to take advice. Law, Compliance, Regulations and Tax change all the time. A family business should have an annual review with the Solicitor for the family. The Solicitor should notify the owners when laws and regulations change.
Paying tax, registering employees, compliance with GDPR and insurance are some obvious matters which should be considered when running a business.
Here are some important legal considerations:
The doctrine of the corporate veil states that a company has a separate legal identity to its shareholders or owners. This essentially means that typically the shareholders are not personally responsible for debts of company and cannot be sued on foot of liabilities/actions/omissions of a company or contracts entered into by a company. Often a business can have a business name and everyone would assume this is a Company as it has a name. However this is not always the case and may not necessarily be a company which is a legal entity. A company is a legal entity and can be sued. This is worth considering and may be worthwhile setting up a company structure for your business and you should speak with an accountant or a solicitor about this.
Most family businesses evolve from a single founding member. It is not always necessary to set up as a company. Other mechanisms can be put in place to afford protection if the desired structure is to operate with the family name.
There are generally three options – Sole Trader, Partnership or a Company. Modern family businesses tend to establish as a Partnership (one or more people jointly responsible) or as a Limited Liability Company (where you, and your business are separate entities).
This Jim Sheridan Film highlighted a very important issue — ownership. A business can purchase a property or Lease (rent) it. Purchasing property gives greater control and security. Paying rent may be more manageable financially, however the lease will often contain restrictive covenants and conditions. It is vital to take legal advice on these.
If the family already owns the asset, consideration may need to be given on a legal transfer. A Lease to the family business may be appropriate.
In Ireland, the deed specifies how it is owned — legally. Caution must be exercised as there can be dire consequences if this is not addressed. If no reference is made on the deed it is assumed the property is held jointly.
The legal term is “joint tenants” In this case, if one owner dies, the property will pass automatically to the survivors regardless of any Will that the owner may have made. If this is not the intention of the parties, it is very important that the words “Tenants in Common” are put in the Deed to ensure each person owns a particular share and that share passes under the terms of that person's legal Estate or under a term in the Business Agreement.
In family businesses, management structure and ownership are often considered the same. They are not always. As a family business grows, it may be necessary to bring in outside employees and managers. Legal, Tax and business rules will continue to change as will family relationships, births, deaths, marriages and other life events. It is essential to define roles, have a management structure in place, decide on payment structure (is it a salary or share of the profits or another structure), whether family members are employees and consider all appropriate factors.
In a family business, the hope generally is that the business remains within the bloodline. However, a spouse has an automatic right to a share of the spouse’s Estate. A Co-habiting partner may also have rights. Children do not have an automatic right to a share of their parents' Estate, but they have an entitlement to argue that adequate provision was not made for them. Any of the foregoing can result in expensive litigation and can affect the structure and operation of the business.
The business needs to have a Succession Plan. It must be reviewed regularly. Each member should have a Will and Enduring Power of Attorney. A Will sets out distribution of assets. An Enduring Power of Attorney enables you to chose “attorneys” to manage your affairs should you become mentally incapable of doing so.
Legal Trusts are very useful for a family business. A Discretionary Trust can save tax, protect the business structure if there is a marriage breakdown or if an income is needed for a surviving spouse etc.
Agree to disagree — Spend time putting agreements in place and review these regularly.
I would advise to get insurance in place which is essential for family businesses. Online Insurance may seem cheap but you could miss essential details. Going through an insurance broker is advisable and may be worthwhile having your Solicitor review the policy.
In the event that a child dies, a business may in certain circumstances revert back to a parent depending on the structure in place. This could result in a significant tax bill for the parents. Parents can receive €32,500 tax-free from their child. Anything above that is taxed at 33%. Parents can receive an inheritance entirely exempt from inheritance tax if, in the previous 5 years the child took a taxable gift or inheritance from either parent.
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