We frequently end up being the “House Doctor” for closely-held, family owned businesses in New Jersey. Most people know that New Jersey is an incredibly expensive and legally complicated environment for business, especially for the family business.My advice to owners (proprietors, shareholders or members) usually centers upon two important aspects of the business life cycle: first, the economically dangerous start-up phase and then the continuation/business succession phase. Ultimately, any pertinent advice must center on the realization that “business is the art of taking risks.” The businessperson must know the risks and then must hedge the risks. Failure to do anything less than that results in more exposure to the risks.
Managing Risk Exposure From The Start
This means, therefore, that limitation of liability becomes an essential starting point. Risk exposure is generally managed through:
- choice of business organization (to include limitation of liability through use of a corporation or LLC),
- adoption of contractual limitations of risk (such as indemnification clause); and
- the proper selection of and purchase of insurance.
Business start-up risk includes possible relational disputes which should be managed through the formulation and adoption of shareholder and/or operating agreements, employment agreements and employee handbooks or policy guides. At the same time, the possible income tax and estate tax exposures must not be ignored and should be managed through contract and tax elections such as Subchapter S.
Long term considerations
Once the business has been properly organized and reaches some level of maturity and critical mass, the existential threat of succession becomes a significant issue. If a principal dies or becomes disabled, who succeeds to that interest, how is the obligation to purchase funded, to what degree are the tax (income and estate, federal and state) and valuation issues addressed and what mechanisms for dispute resolution are in place?
All too often, we see where these many risks are not addressed or ignored altogether. The analogy of a house being built without a foundation comes to mind. Does it make sense to spend time and money on a business, upon which the family’s fortunes may be entirely dependent, only to allow it to collapse because such fundamentals are not addressed? Although the answer seems obvious, this question ends up being rhetorical for the many. Further, even where issues have been addressed, it is critical that those solutions be revisited from time to time as changes in circumstances and the law may render them obsolete or otherwise inappropriate.
The smart (and successful) entrepreneur comes to realize that, with family business success, a more sophisticated and evolving approach must be taken that requires an investment in the advice of professionals. Family business owners who understand that the start-up mentality must be overtaken by a bigger and growing commitment to getting the answers and hedging the risks end up being the winners in the dangerous business of doing business.