Bringing the next generation into your family business
We are often asked to advise business owners about how to bring younger members of their family into the family business. Typically there will be tax and financial implications involved, but in today’s blog we will be looking at how existing owners can maintain a significant legal control even though they are prepared to pass on some share of ownership.
Firstly, it is necessary to establish an appropriate structure. Many businesses are run through companies but, particularly in the farming sector, a partnership may be the better choice. A number of factors should be considered when settling on the structure. Once the structure has been decided, it will be possible to put in place contractual arrangements that suit the circumstances of the particular business and family.
For a company, the relevant arrangements will be recorded in the company’s articles, a shareholders’ agreement or in a combination of the two. The articles are a public document, but the agreement can generally be kept private. This means that owners typically want to record sensitive arrangements in the shareholders’ agreement.
If the business is run as a partnership, the arrangements between the partners will be private. There is no legal requirement to have a written partnership agreement, but there are commercial benefits in doing so.
Whichever route is chosen a key question will be whether one owner should be given enhanced rights over another. In a company, this can be tied into share ownership, with the original owner perhaps having more shares or shares of a class with improved rights. This can be backed up by a provision in a shareholders’ agreement that says that certain specified acts can be taken only if the original owner approves. A partnership agreement can include similar provisions.
A solicitor can produce a list of suggested acts that require the original owner’s consent. This could include: taking on new premises for employees or entering into contracts with a value above a certain amount. It’s important to note that these arrangements are only binding as between the participants – not third parties who deal with the business. It’s also important to remember that your solicitor will be able to produce a suggested list but won’t necessarily be able to identify everything relevant to your particular business, so you’ll need to think about what is important for you personally.
Clare Richards is a partner and solicitor in the Business Services team