Owning a” mom-and-pop” shop with a group of family members can seem like a good idea until…
Your mom decides to take over the accounting books and will not share them with anybody. Then your dad decides he can order large amounts of inventory because he thinks every store needs 1,000 pieces of widgets A, B, and C. You have no idea where the money is, where it went, or who really is in charge!
Before you and your family members take the family dream from an around the table chat to reality, here are at least 3 things you should know and at least 1 thing you absolutely SHOULD DO.
3 THINGS YOU SHOULD KNOW BEFORE YOU START A BUSINESS WITH FAMILY MEMBERS:
1. DEFINITION OF A PARTNERSHIP
A partnership is “an association of two or more persons to carry on as co-owners [of] a business for profit.” Corp. Code, § 16101. When you set up shop with your family members, BAM! You are now a partnership. There are of course exceptions to this, but I am over generalizing to make a point. If you do not incorporate, form a limited liability corporation, or take any additional steps to create a business entity when you and “two or more persons” in your family get together to start a business, by default you are a general partnership.
I have had clients tell me, “But, Judith we are not selling any products.” That does not matter! The definition of business under the California Corporations Code is pretty broad. “Business includes every trade, occupation, and profession.” Corp. Code, § 16101. So whether you are selling your mother’s famous cupcakes at a stand or are selling wedding planning services, if you have not taken additional steps to create a business entity you and your family members are by default a general partnership.
What you choose to call yourselves does not matter. Courts will look to the “nature of the parties relationship” when determining whether you and your family members are a partnership. It is important to know that a general partnership is the default if you and your family members do not take any additional steps because with that “default” status also comes “default” corporation code provisions. What started as the family dream can quickly turn into your own personal episode of Jerry Springer!
2. RIGHT TO SEE THE BOOKS
Your Auntie Irma who is good with numbers may not be the best person to do your accounting if she is also known for being stingy and bossy.
In our somewhat silly example, Auntie Irma as a partner of the business is required to give all partners, their agents, and attorney’s access to the partnership’s books and records. The books and records cannot be kept at Auntie Irma’s house for her eyes only. The books must be kept at the partnership’s “chief executive office.” Auntie Irma cannot tell you that she is keeping track of the numbers in her head. The books and records must be kept in writing or in some form that can be converted into something tangible.
For more information on books and records check out California Corporations Code Section 16403.
3. THE PARTNERSHIP IS LIABLE FOR ACTS OF THE PARTNERS
Do not feel bad if you have to tell your Drunk Uncle Bob that he cannot be the driver for the family’s new floral delivery business. The partnership is liable “for losses, injuries or penalties incurred as a result of a wrongful act or omission or other actionable conduct of a partner acting in the ordinary course of the partnership’s business or with the authority of the partnership.” Corp. Code, §16305.
If while acting in the ordinary course of the partnership’s business, in our example delivering flowers, Drunk Uncle Bob runs somebody over, the partnership is now responsible for the losses, injuries, and penalties that result. The drastic consequence in our example is that all partners of the partnership are also on the hook for Drunk Uncle Bob’s “accident.” In legal terms—“each partner is jointly and severally liable” for everything that the partnership is responsible for. If you are going to work with family, make sure the family members you choose to work with are reliable and understand the consequences.
This list of things you should BEWARE of before you go into business with family members is just the tip of the iceberg. Please see my previous post here about the pros and cons of a partnership.
ONE THING YOU SHOULD DO BEFORE YOU START A BUSINESS WITH FAMILY MEMBERS:
If you cannot afford to create a corporation or limited liability corporation before you go into business with family members, at the very least PUT A PARTNERSHIP AGREEMENT IN WRITING!!! Please see my previous post here about the basics of a partnership agreement.
If you have your own version of Auntie Irma and Drunk Uncle Bob, then perhaps you should think twice about starting a family run partnership. Sometimes even the best partnership agreement will be of no use if you do not have family members that will respect it.
What are your thoughts? We’d love to hear from you. Post comments below.
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Furthermore, the information contained on this blog is not specific to any particular set of circumstances. All links to outside information are meant to provide further information on the topic addressed, I make no warranties, express or implied, as to the accuracy of the information contained herein or in the attached links.