Friday, 22 June 2018

Family Businesses - Avoiding the Pitfalls

Twice in the last week alone, our Commercial Team have been asked to assist with problems involving family businesses. It can be extremely difficult for those involved and sadly the emotional stress can often result in family breakdowns. 
Frustratingly for us as advisors, it nearly always comes down to the same simple issues which are easily avoidable, so here are a few tips which you should follow:
1) Understand your duties as a director
It is quite common in family businesses for family members to be appointed as a director even though they may have little or no involvement in the business. This is often suggested by accountants for tax reasons. 
However, as a director it is essential that you know what is going on with the businesses on a day to day basis, especially where finances are concerned. Directors have certain duties and, in some circumstances, you may be held personally liable where those duties are breached. 
If you are a director of a family business:
  • It is therefore essential that you understand your duties as a director and take them seriously. 
  • Take the time to understand the finances of the business and make sure that obligations, especially to HMRC and the banks, are being met.
  • If you are not able or willing to be involved, consider resigning, as personal liability cannot be escaped by pleading ignorance.

2) Be open
Family businesses often rely too much on trust, with people being left to their own devices without the checks you might expect in a normal organisation. When the business faces a challenge, this trust can become an enormous burden, often resulting in problems being covered up or understated, whilst attempts are made to fix the situation. 
Unfortunately the others may be unaware of the problems until debt recovery letters arrive, perhaps from a supplier, HMRC or even the bank looking to repossess the family home. By this point it is often too late to save the business and sadly, the sense of betrayal can lead to the breakdown of the family relationship too. 
To avoid this:
  • Meet regularly to review the finances and ensure obligations are being met. 
  • If there are problems, share them. There is more chance of a successful outcome if everyone is working on a solution. This is the benefit of having a board of directors.
  • Implement checks to ensure that tasks are carried out properly and do not leave important jobs to one individual 
3) Agree it, document it
Family members often come to arrangements between themselves that are not documented. This may take the form of a loan or the transfer of shares and property. Because of the close family relationship, people often feel it unnecessary to document the arrangement and, 9 out of 10 times there will be no issues. 
However, what if the unexpected happens? How do you prove whether the transfer of money was a repayable loan or a gift, or that money paid was actually consideration for a property which has yet to be transferred? This can become a big problem in the event of divorce or death as it may have a significant affect on the distribution of assets. 
It is therefore important to take advice and document agreements properly. This may also provide important evidence when it comes to paying tax. 

4) Tell your advisors everything
Finally, there is no point seeking advice unless you tell your advisors everything. Accountants and solicitors can often help, but only if we know the full picture and understand precisely what you are trying to achieve. By withholding information you can create big problems. 
This was the case recently where we advised on a family situation. Money had been spent on taking advice from an accountant and a solicitor but both had been told one thing, whereas the family had actually agreed completely different terms behind closed doors. 
The tax saving they thought they had made paled into insignificance compared to the liability for other taxes they had not considered. Furthermore, following the death of one director, the others then disagreed over the term of the deal they had made and, because the terms agreed were completely different to the terms recorded in the documents, the agreement could not be enforced. 
No doubt the advisors could have found a solution that worked for everyone had they been given the full details and significant tax liabilities could have been avoided.
Whilst these examples may seem unlikely, they will be all too familiar to those of us advising family businesses on a regular basis. 
By understanding your obligations, meeting regularly, sharing problems, documenting agreements and taking proper advice, you may reduce stress, save money and grow your business all without risking the most important thing, which is the relationship with your family. 
If you require advice on any of these issues please get in touch with Tom Paget in our Commercial Team on 01380 722311.

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