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Don’t Let Your Friends and Family Ruin Your Small Business

Thomas W. Hartmann, Hartmann Law Firm LLC, TheHartmannLawFirm.com; [email protected]; 908 769 6888

While friends and family can go into business together, they should do so as business partners, not life-long buddies. Soon enough, there are bumps in the road with money and responsibility, often based on claims that one person works harder, brings in more business, is smarter, has better ideas or has contributed more. Even the Rothschilds, the most successful family business in history, had a written plan for their business dealings among five brothers across Europe.

A business shared among family or friends should be treated as any other business. The nature of the business should be documented in an LLC operating agreement or a corporation shareholder agreement. Stock or member interests should be accounted for in a corporate management book. Family loans or angel investments should be carefully recorded.

Shareholder loans should be in the form of notes and follow standard lending practices. No shareholder or member should just forego an employment paycheck, call it a loan, not document it, take repayment in petty cash or demand a payment later when no one can remember the loan. Payroll and petty cash have specific purposes, and they should not be disguised as shareholder loans or loan repayments.

Credit cards are company property. They should be carefully controlled and the accounts should be reviewed by all owners monthly. The regular review will insure that all owners know exactly how the credit card is being used. Each owner should initial the card account monthly.

Absolutely no personal expenses should go on a company card. If there is to be an intent that the owners can use the card for coffee or lunch or snacks for the office, then that should be agreed in writing. When fights start, this is often where they begin. This is also where wider misuse of the credit cards begins as free coffee leads to free gas, groceries, alcohol and more personal items.

Do not get behind on company bills and expect either another shareholder or an old aunt or parent to bail out the business. Even if this works once or twice, auntie will tire of this fast. A shareholder loan to pay bills is often the first sign that the business cannot support itself. It can also be the beginning of bad blood among owners as the owner-lender will not want to see the other owners benefit unfairly from his largess.

Be brutally honest and realistic. If the business is borrowing from its owners with no good reason and no clear plan for repayment or business recovery - stop. Do not start trying to get a new line of credit or a new loan with a new mortgage and new personal guarantees. Assess the core problems and fix them - or recognize that this team cannot fix them and take corrective action, even if that means drastic and immediate changes.

The alternative to this is fighting internally - daily fights in the office, followed by secret visits to attorneys and accountants, and nasty letters and litigation, all at great expense to the company and the individual owners. Sometimes courts then appoint receivers or fiscal agents (who charge by the hour) to run the business because the owners have shown they cannot.

This happens in parent-child run businesses, sibling run businesses, best friend run businesses and many other small businesses that stem from an strong personal relationship among the owners. Such businesses can and regularly do work. But, they work because they are run in a hardheaded, no nonsense way which recognizes that economic reality runs the business, not nostalgia, feelings or hopes of a better tomorrow.

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The Hartmann Law Firm LLC

56 Ellison Rd
Watchung, NJ 07069
Telephone: 908-731-6976 
Toll Free: 877-223-9930
Fax: 908-462-3808
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