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Keeping It All in the Family

Keeping It All in the Family

Do you remember the movie classic “The Godfather”? There is a famous scene where Michael Corleone says to his wife: “Don’t ask me about my business”! There is a good message here in deciding what information about a family-owned business to share with your spouse.

Family Business Failures

Sometimes, New Jersey family businesses fail due to the interference of a spouse. This typical scenario involves a relative of the founder of the offspring marries someone who is not involved in the business. That person makes decides that, due to the marriage, he or she now has a right to influence the operation of the company. This might be the offspring telling his or spouse that they are under-compensated, they do not have enough of a role in the management of the business, or that they should have a greater ownership interest. The spouse causes dissension among the family member-owners and damages the business. To avoid this scenario, family members who jointly own a company should do the following.

If the business is organized as a limited liability company, there should be an operating agreement between the members of the limited liability company. If the business is organized as a corporation, there should be a shareholder agreement. The agreement should clearly define the roles and responsibilities of each shareholder in the limited liability company. It should also prohibit the employment of the spouses of family member-owners.

Owners should seriously consider entering into a prenuptial agreement with their prospective spouses that clearly establishes that the ownership interest in the family business is a premarital asset and is not subject to equitable distribution in the event of divorce. Growth of the business subsequent to the marriage should also be addressed vis-à-vis how it is to be treated in the event the marriage dissolves. Legal advice from an attorney with expertise in premarital agreements should be sought.

Finally, family member-owners in a closely held business should consider having a formal valuation of the business done on a periodic basis by an outside valuation firm. This will help to establish value in the event of divorce, death of an owner, or the buyout of an owner.

Perhaps most important keep quiet about what you share with your spouse.

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