In the UK, there are over 5 million family run businesses, making them a large part of the economy. However, family businesses can be more complex; combining personal relationships with professional ambitions.
This can be deeply rewarding, but it also comes with unique legal and practical challenges. Whether you’re considering starting a family business or managing one passed down through generations, it’s vital to ensure the right legal structures and governance are in place.
At Backhouse, we regularly advise family-run businesses across various sectors, helping them to thrive whilst avoiding common legal pitfalls. This article outlines the key areas that every family business should be aware of, no matter what stage you are at.
1. Clear Business Structure
Like any business, choosing the right legal structure for your family business is extremely important and may impact any liability, tax efficiency, and succession planning. Based on your circumstances and objectives, you may opt for a partnership, limited liability partnership (LLP), or private limited company (Ltd):
- Limited Companies make it easier to separate ownership from management. They also offer limited liability, meaning that your personal assets are protected.
- Partnerships can be simpler to set up but may expose family members to more personal financial risk unless structured properly. Please see our article on the Roles and Responsibilities of Partners for more information.
We can help you assess your long-term goals and choose a structure that supports growth while protecting your family’s interests.
2. Formal Agreements Matter!
It’s tempting to rely on verbal agreements within families, but even the closest relationships can sour under pressure. We strongly recommend putting formal agreements in place, including:
- Shareholders’ Agreements (for companies)
- Partnership Agreements
- Employment contracts
- Loan Agreements (where family members lend or invest capital)
These documents help to clarify any roles, responsibilities, profit-sharing arrangements, succession and what happens in the event of a dispute or unexpected exit. No matter how close you are, the potential for conflict in a family business can be considerable. Therefore, having these documents in place at the outset ensures that matters are decided ahead of any conflict, which helps to prevent any argument later.
3. Succession Planning Is Essential
Has it been agreed who will take over the business when the current generation steps down? Succession is often the most sensitive and overlooked issue in family-run businesses.
Key considerations include:
- Wills and estate planning
- Transferring shares or business interests
- Training and mentoring future leaders
- Tax implications of transferring ownership
Involving the next generation is an essential part of the process, but there is no one-size-fits-all approach. Having a clearly defined succession plan reduces uncertainty and conflict, ensuring a smooth transition that protects both the business and family harmony.
4. Conflict Management
Disagreements in any business are natural, but family dynamics can add complexity. It’s important to create structures that allow for professional conflict resolution, such as to:
- Establish regular meetings with agreed-upon agendas
- Consider bringing in non-family board members or advisers
- Include dispute resolution clauses in your formal agreements
Taking a proactive approach can help prevent personal tensions from derailing the business and your relationships.
5. Tax and Compliance
Family businesses must meet the same regulatory and tax obligations as any other commercial enterprise. Key areas to watch include:
- Corporation Tax and VAT
- Income tax and dividend treatment
- Inheritance Tax planning
- Employment law compliance
Working with legal and tax advisers ensures your business remains compliant while maximising available reliefs and exemptions.
6. Protecting the Business in Divorce or Death
What happens to a family member’s share of the business if they die or divorce? Without proper planning, ownership could unintentionally pass to a non-family member.
We recommend:
- Including business assets in prenuptial or postnuptial agreements
- Reviewing articles of association and shareholder agreements
- Considering buy-back clauses or pre-emption rights
Planning ahead protects the continuity of the business and avoids complex legal disputes.
Help from the experts at Backhouse
Running a family business can be incredibly fulfilling, but it’s essential to treat it as both a personal and professional endeavour. Investing in the right legal advice now can save time, money, and relationships in the future.
At Backhouse, we offer tailored legal support for family businesses, from incorporation to succession planning and everything in between. If you’d like to speak to one of our Commercial law solicitors about your business, please contact our team today.
Tel: 01245 893400
Email: info@backhouse-solicitors.co.uk
Visit: 17 Duke Street, Chelmsford, CM1 1JU
Or send us a message through the Contact Us page on this website.
