By Fredrick P. Niemann, Esq., a NJ LLC Attorney
Many individuals look up to family-owned businesses, as they have long been a staple in the American economy. While there have been numerous success stories, it is important to note that not all family-owned corporations run smoothly. In fact, there are a number of problems that can arise within a family-run enterprise that the general public does not usually think of.
Family-run corporations present an ideal situation for majority shareholders to oppress minority shareholders. The closed-nature of the business allows majority shareholders, typically the older family members, to rule over the company to the detriment of younger family members that hold a minority share in the business. Majority shareholders may refuse to declare dividends, drain corporate earnings, pay extreme salaries to their favorite sons or daughters, and even refuse employment to competent family members based purely on their own personal biases. Majority shareholders in family-run businesses also have the opportunity to “squeeze-out” or “freeze-out” minority shareholders, two actions involving the use of preclusive, coercive tactics to force other shareholders out of the business.
Another problem that may arise in family-owned corporations is the intertwining of family issues and the business. Family members, often unintentionally, take their emotions from their homes into the office. Disagreements on the home-front may hurt the business. Feelings of pride, jealousy, and distrust toward other family members may influence business decisions. Old family feuds may arise, negatively influencing operation of the corporation.
Family businesses also unfortunately may be faced with a dominant head that refuses to cede power and will not listen to the advice of others. Often as they age, elder family members that are also the majority shareholders may feel as though nobody can run the business as they do. They may also fear reaching a point where they are not needed anymore. Whatever the reason, these shareholders may insist on running the business in an inefficient manner, failing to listen to younger, more knowledgeable minority shareholders.
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