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Spring Cleaning – For Your Family Business

Spring is often thought of as a time for renewal—many of us –when we think of spring– we think of washing our car and cleaning out back closets. For family businesses, spring is a good time to clean-out the dust or clutter of your company.

 

There are several “closets” a family business may wish to clean out—and the following are examples of a few: “Minute-book Mess”, “Compensation Confusion” and “Polishing Policies.”

 

Minute-book Mess– “Our family business corporate documents haven’t seen the light of day in over 15 years.” This is more common than most people think, but there are simple and inexpensive solutions. Cleaning this closet is easy! Don’t worry or ignore this mess. You need the protection of accurate corporate records so that your corporate entity will be recognized by third parties (such as the IRS and litigators) as a separate entity from the individual shareholders and directors. In cases where the corporation does not have significant assets and when various corporate formalities are not consistently maintained, then a court may disregard the corporation and hold the individual shareholders and directors personally liable! Your family business needs to carry out your business and look and act the way a corporation should –so that the courts will not disregard your corporate form and hold you personally liable. The State of Ohio offers very strong protection to shareholders and directors , but in order to avoid “piercing the corporate veil” as described above, the corporate records need to be up to date.

 

The spring-cleaning of the minute book requires a review of the entire minute book, so make sure the formation documents are accurate, and that annual shareholder and director minutes are recited (unless the company has properly adopted a “close-corporation.”) Ratification minutes can be executed for any actions that may have occurred since the last meetings, stating that the directors and shareholder approve such actions. The entire process is very quick, and inexpensive….and should not be overlooked.

 

Compensation Confusion –The more difficult closet to clean for family businesses is the problem of Compensation Confusion. “Compensation Confusion” occurs when a family member is not paid ‘market value’ for his or her work…but is paid either More or Less. If Dad hires son to enter the family business to receive compensation which is more than a 10 year employee doing the same thing as newly hired son, then the effect on non-family members can be devastating. In addition, son may never leave —even if he is not adding any value to the business, but just taking out a salary. If valuable family members are paid less than market value, they often will leave –never to return—even if “someday this will all be yours” is the carrot. Compensation Confusion can also occur when all children earn the same salary – thus taking away the incentive to work hard and do a good job.

 

Take stock of the various salaries paid in your family business and take a hard look in the back corners —filled with relatives. Make sure your compensation is actually based on pay for performance. Be careful of the payments to family members who do not perform the expected work for such compensation- unless you want the IRS to be a partner in your business. The IRS will often examine family owned businesses to analyze the compensation paid to any owner-employee to see if some portion of the family member’s salary should actually be classified as a dividend, especially if only small dividends are paid…and unusually large salaries.

 

This topic may be appropriate for a spring meeting of the family business council. At the council, topics which could be discussed include: What is expected of you as an employee/family member? Why it is important to pay market value for work done. What does “pay for performance” really mean for family members? Why is “fair” not always “equal.” And…Even though our family owned business wants to provide compensation for family members —we are in business primarily to make a profit.

 

Polishing Policies –Another area to clean-out is the collection of old (and not up-to-date) policies hanging around. Spring is a great time to update personal employee information such as addresses, phones, cell phones and other contact information. In addition, the laws in connection with Employment, Ethics, Conflicts of Interest and Investments have all undergone revisions in the last few years. Are the policies contained in your employment manuals up-to-date? Do they match the latest rules concerning the Family Leave Act? Did Sarbanes affect your business…even if you are not public? Do your accountants require or desire changes to the management style of investments and financial decisions? Does your insurance carrier want changes to your policies for use of automobiles?

 

The Internet has also created its own issues —are your confidentiality and internet user policies up to date? When employees log on to your computers, do they acknowledge that there is no expectation of privacy?

 

As for policies just for family businesses: is it time to up date the policy as to when a family member can join the business? Do family members need to work outside the business for two (or more) years prior to joining the business? What is the work ethic required for family members and does the policy outlining expectations and responsibilities need to be updated? Again, the family business council is the correct forum for discussing and resolving any issues related to these policies.

 

Spring is a great time to remove clutter ….