Ask the Experts: Starting a Family Business With a Strong Foundation
By: Kelly Allen | Adkison, Need, Allen & Rentrop PLLC
Q: What should a family consider when they run a business together? Does the Michigan Liquor Control Commission (MLCC) have any regulations impacting succession plans?
A: Yes, if a family business operates with any kind of liquor license, the owners must be aware of certain requirements of the MLCC and general law regarding company organization and estate planning.
Operating any kind of business with your family has great benefits and some pitfalls. Take it from me! As the oldest of ten children, I have had five of my eight brothers own and operate bars and restaurants. This is how yours truly became involved in this area of the law.
When things are great, and everyone pulls their own weight, everyone is happy. But there are inevitably bumps in the road. Some of the bumps include financial instability, accountability to each other, and long, hard hours which affect the partners’ families.
A: Yes, if a family business operates with any kind of liquor license, the owners must be aware of certain requirements of the MLCC and general law regarding company organization and estate planning.
Operating any kind of business with your family has great benefits and some pitfalls. Take it from me! As the oldest of ten children, I have had five of my eight brothers own and operate bars and restaurants. This is how yours truly became involved in this area of the law.
When things are great, and everyone pulls their own weight, everyone is happy. But there are inevitably bumps in the road. Some of the bumps include financial instability, accountability to each other, and long, hard hours which affect the partners’ families.
Company Formation:
Prior to even thinking about working with your family, the family should obtain good corporate counsel, estate planning counsel, and a CPA. The operating model and succession plan should be decided upon before embarking on one of the toughest yet most rewarding industries in the world. Working and owning a business with people to whom you are related tends to raise issues you might not find in other business relationships. The key is having advice while getting into business, a roadmap for succession, and an exit strategy. While this may seem costly, the cost of not doing so and ending up at odds with family members is much more costly, to both your business and your relationships.
Ownership:
The family should decide how the business will be owned and what percentage of the business each person will own. The options usually include forming a limited liability company or a corporation. These relationships must be legally documented.
Prior to even thinking about working with your family, the family should obtain good corporate counsel, estate planning counsel, and a CPA. The operating model and succession plan should be decided upon before embarking on one of the toughest yet most rewarding industries in the world. Working and owning a business with people to whom you are related tends to raise issues you might not find in other business relationships. The key is having advice while getting into business, a roadmap for succession, and an exit strategy. While this may seem costly, the cost of not doing so and ending up at odds with family members is much more costly, to both your business and your relationships.
Ownership:
The family should decide how the business will be owned and what percentage of the business each person will own. The options usually include forming a limited liability company or a corporation. These relationships must be legally documented.
Deadlock:
Families should be careful not to create situations where a disagreement can led to deadlock. Deadlock can adversely affect the business and the family relationship. If, for example, two brothers own the company equally, there should be a provision in the company’s operating agreement or a buy/sell agreement which clearly spells out how to break a deadlock.
Succession Upon Death or Withdrawal:
The legal agreement among family members should state what happens if a member dies or withdraws from the company. Can that member’s spouse automatically become a member of the company? Does the membership interest of the deceased or withdrawn member automatically get offered to the remaining members?
Families should be careful not to create situations where a disagreement can led to deadlock. Deadlock can adversely affect the business and the family relationship. If, for example, two brothers own the company equally, there should be a provision in the company’s operating agreement or a buy/sell agreement which clearly spells out how to break a deadlock.
Succession Upon Death or Withdrawal:
The legal agreement among family members should state what happens if a member dies or withdraws from the company. Can that member’s spouse automatically become a member of the company? Does the membership interest of the deceased or withdrawn member automatically get offered to the remaining members?
MLCC Considerations:
When operating with a liquor license, every change in the ownership of the licensed business requires either prior approval of or notice to the MLCC. Some of the MLCC requirements do not usually occur to owners and can lead to costly MLCC violations against the licensed entity.
When operating with a liquor license, every change in the ownership of the licensed business requires either prior approval of or notice to the MLCC. Some of the MLCC requirements do not usually occur to owners and can lead to costly MLCC violations against the licensed entity.
- Transfer of Membership Interest or Stock in the Licensed Entity. If the licensed entity is transferring ten percent (10%) or more of its interest from one member to another, prior approval of the MLCC is required. An agreement setting forth the terms of the transfer and forms must be submitted to the MLCC. Oftentimes, these transfers are referred to the MLCC’s enforcement division for investigation. If less than ten percent (10%) is being transferred, notice must be provided to the MLCC, which can be done by filing MLCC forms.
- Transfers to Trust. If any individual member transfers their interest to a trust, the MLCC must be notified. MLCC forms, a certificate of trust, and certain provisions of the trust must be submitted to the MLCC.
- Death of a Member. If a member of a licensed entity dies, the MLCC must be notified of the death, and a death certificate must be provided. The MLCC must also be advised about the disposition of the deceased’s interest. If there was an instrument created prior to the death, such as trust, which takes effect upon the death, a court order is not usually required. However, if a death occurs and there is no trust appointing a trustee or a personal representative, the MLCC will require a court order appointing a personal representative over the deceased’s estate and what are called letters of authority.
Families are the fabric of our lives, and the hospitality industry especially seems to attract great family teams. Having made decisions at the front end, however, is good for business – and means great family gatherings rather than rancor at the Thanksgiving table!
The MRLA has partnered with a strong team of law firms that are industry experts, available for counsel on any legal matters affecting the hospitality industry. MRLA Members get exclusive access to legal help from experts like Kelly Allen of Adkinson, Need, Allen & Rentrop PLLC, with up to 15 FREE minutes of legal consultations with one of our partnering law firms. Click the link below to learn more!
