By Fredrick P. Niemann, Esq., a NJ LLC Attorney
Even with the plethora of big corporate businesses out there today, family-run enterprises remain the foundation of American commerce. The general public has come to know many family-owned LLCs as reliable businesses that provide quality products/services and loyalty to their customers. Along with this reputation, there are many advantages to operating a family company. The close relationship between family members provides a unique aspect of management that even the closest of business associates in public corporations have a hard time replicating. Family businesses also pass the business through the family over the years, so customers know they can rely on consistent operation of the business. However, along with the many advantages comes certain disadvantages to running a family-owned business that all should be aware of.
First, based on the closed nature of family-owned LLCs, the opportunity for minority shareholder oppression is significant. Majority shareholders, such as an evil older brother for example, may withhold certain corporate dividends, pay monstrous salaries to themselves and their favorite family members, or potentially refuse employment to certain family members who own less shares in the company. There is also the potential for the majority shareholder to “freeze-out” or “squeeze-out” the minority shareholders, actions in which the younger siblings are forced out of the business by the majority shareholders coercive tactics.
Another disadvantage is the potential for family problems to creep into the workplace. Ego, jealousy, pride and other emotions, along with simple disagreements, stemming from the home front can be a detriment to the business. Past family bickering may surface and take precedence over proper business operation.
Family-owned LLCs must also be careful of powerful patriarchs/matriarchs who refuse to give up power in the business. Our elders often do not want to cede power to younger siblings or their children. This may be due to their feelings that nobody else can properly run the business or because of a fear of reaching needlessness. Whatever the reason, powerful patriarchs/matriarchs may fail to listen to advice, refuse to collaborate with other members, and overall fail to see their own weaknesses that are holding the business back.
Other disadvantages within the family-owned LLC include conflicts of interests due to family members occupying various corporate positions, prevalence of informality within the business, and feelings of being undervalued by children or younger siblings, which may lead to conflict. With proper awareness, family-owned businesses can hopefully avoid some of these disadvantages that typically arise.
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