Constitutions don't just set down fundamental rules and processes for countries; they can also set rules down for families—especially families with businesses. Having certain processes and governing principles put to writing can help reduce conflict and ensure that all involved parties are treated fairly.
Learn how a family business constitution can preserve your family's legacy while smoothing the transfer of intergenerational wealth and minimizing family conflict.
What is a Family Business Constitution?
At its most basic level, a family business constitution is a document that helps manage and deal with the many contingencies associated with running a family business.[1] Such a constitution can do the following:
- Articulate the business's philosophy, motto, and governing principles;
- Strike a balance between the family's welfare—such as the salary or benefits family should receive—and the business's welfare—such as the percentage of profits that should be returned to the business;
- Outline the business's strategy, including both short- and long-term goals; and
- Provide a mechanism by which to resolve any management disputes.
These constitutions can be amended as the family business evolves, always keeping the business's overarching goals and purpose in mind. One of the many benefits of creating an evolving family business constitution is that it encourages all family members who are involved in the business to consistently discuss their shared vision and ensure that everyone is on the same page.[2]
What Elements Should a Family Business Constitution Include?
Although there's no one-size-fits-all approach to a family business constitution, there are several key elements each of these constitutions should include (or, at a minimum, acknowledge the element and explain why it is unnecessary).[3]
- An explanation of the business's structure (including the structure of any Board of Directors)
- Succession plans in case the company's leader is incapacitated or absent;
- How family members will be hired, compensated, evaluated, and terminated;
- How the business should communicate with employee (and non-employee) family members;
- How disputes should be resolved;
- What guidelines will govern the sale of the business, including how many officers must vote to approve a sale;
- How the business is to be treated in any employees' or officeholders' premarital agreements;
- Whether non-family members can have an ownership or management stake in the business; and
- How the constitution can be amended (e.g., by a majority vote, a unanimous vote, or something else).
The process of drafting a family business constitution can be a valuable one. It may bring to light some fundamental disagreements between managing family members or present some areas for compromise. By discussing each of the above factors with your family members and learning the lay of the land, you'll be in a better position to tackle any potential complications that come your way.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide
specific advice or recommendations for any individual.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company
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All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
[1]https://www.dwt.com/blogs/family-business-resource-center/2017/10/the-family-business-constitution
[2]https://home.kpmg/xx/en/home/insights/2017/07/a-family-constitution-increases-family-cohesion-and-business-connectivity.html
[3]https://johndavis.com/three-components-family-governance/
Sources
https://www.dwt.com/blogs/family-business-resource-center/2017/10/the-family-business-constitution
https://johndavis.com/three-components-family-governance/
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