Family businesses need written agreements to clarify ownership, define responsibilities, and establish how important decisions will be made. Even when relatives trust one another, misunderstandings about money, authority, or the business’s future can lead to disputes. A written agreement helps establish expectations before disagreements arise.
Many family-owned businesses begin informally, with relatives contributing time, money, or resources based on shared understandings. As the business grows, those arrangements may become difficult to manage, particularly when new family members join or ownership changes.
What Agreements Should a Family Business Have?
The agreements your business needs depend on its legal structure, ownership arrangements, and operations. In Pennsylvania, LLCs, corporations, and partnerships are governed by different laws, making it important to choose documents appropriate for your business.
Common agreements include:
- Operating agreements: Establish ownership rights, management responsibilities, and financial arrangements for an LLC.
- Shareholder agreements: Address ownership transfers, voting rights, and other matters among corporate shareholders.
- Partnership agreements: Define how partners share profits, make decisions, and handle changes in the business.
- Buy-sell agreements: Establish procedures for transferring ownership when an owner retires, dies, becomes disabled, or wants to leave.
Employment agreements may also be appropriate when family members work in the business but do not hold ownership interests.
Why Are Verbal Agreements Risky in Family-Owned Businesses?
Verbal agreements can create uncertainty when family members remember conversations differently, or their circumstances change.
For example, a parent may promise a child an ownership interest in exchange for years of work. Without a written agreement, questions may arise about when that ownership begins, how much of the company the child receives, and whether other family members have similar expectations.
Although some oral agreements may be enforceable under Pennsylvania law, others must satisfy specific legal requirements. Proving the terms of an informal arrangement can also be difficult.
Written agreements provide a clearer record of what the parties intended and reduce reliance on conflicting recollections.
How Can Written Agreements Prevent Family Business Disputes?
Family relationships can make business disagreements particularly difficult because personal expectations often influence professional decisions.
A written agreement establishes procedures for resolving issues before they become personal conflicts.
Clarifying Ownership and Financial Rights
Family members may contribute to a business in different ways. One person might provide startup capital while another manages daily operations.
An agreement can distinguish ownership percentages from compensation and profit distributions. It can also address additional capital contributions and what happens when the business needs more funding.
Establishing Decision-Making Authority
Not every family member involved in a business necessarily has equal authority. Written agreements can identify who manages operations, which decisions require owner approval, and how voting rights are allocated.
For example, an agreement might allow a managing family member to make routine purchasing decisions while requiring broader approval for major borrowing or the sale of business assets.
Creating a Process for Resolving Disagreements
When owners disagree about the direction of a company, a lack of clear procedures can delay important decisions. An agreement may establish voting thresholds, mediation requirements, or procedures for resolving deadlocks. These provisions can help the business continue operating while disagreements are addressed.
What Happens When a Family Business Owner Wants to Leave?
An owner’s departure can create financial and operational challenges, especially when the remaining family members disagree about the value of that person’s interest.
A buy-sell agreement can establish how ownership interests will be valued and transferred. It may address voluntary departures, retirement, disability, or death.
The agreement can also specify whether other owners or the business have the right to purchase the departing owner’s interest and how the purchase price will be paid.
Without these provisions, the business may have to rely on statutory default rules or negotiate an exit during an already difficult situation.
Why Is Succession Planning Important for Family Businesses?
Succession planning addresses who will own and manage the business when the current generation steps away.
Ownership and management do not necessarily have to pass to the same person. A family member may be well-suited to operate the company without becoming its majority owner, while another may hold an ownership interest without participating in day-to-day decisions.
Written succession arrangements can help clarify these distinctions.
They should also be coordinated with estate planning documents and existing business agreements. Otherwise, provisions governing ownership transfers may conflict with a family member’s intended inheritance arrangements.
Do Pennsylvania Family LLCs Need an Operating Agreement?
Pennsylvania law generally does not require an LLC to adopt a written operating agreement — an operating agreement may be oral, written, implied, or a combination of these forms.
However, relying on an informal agreement can leave important questions unresolved. When an operating agreement does not address a particular issue, Pennsylvania’s LLC statute may supply default rules. Those rules may not reflect what family members expected or intended.
A carefully drafted written operating agreement gives owners an opportunity to establish arrangements that fit their business, subject to applicable legal limits.
Put Your Family Business Agreements in Writing
Trust and shared goals can help a family business succeed, but they cannot resolve every question about ownership, management, or succession. Written agreements establish expectations and provide a framework for addressing changes before they threaten the business or family relationships.
At Jones, Gregg, Creehan & Gerace, we assist family-owned businesses throughout Pittsburgh and Western Pennsylvania with business formation, contracts, and ownership matters. Connect with us today to review your existing agreements and to protect your business as it grows.