Peer-to-Peer: How can I protect my personal finances from the family business?

Written by ProfitGuide Staff


A worried reader from Western Canada asks: “My husband and his father are thinking of going into business again. Unfortunately, previous family business ideas have always lead to us holding the bag — in other words, my husband and I have been the ones to shoulder the work, and the losses in the end. How can we protect ourselves this time? What can we do to protect our home and our future income?”

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Reader responses

Mike Smith, ON

My response to this classic question is simple:

Treat your father as though he were any other (non-related) business partner. That is, tell him….

“No offense, Dad, but just to make sure we have a clear understanding of who’s going to do what and who’s responsible for what in this partnership, (and that we love each other as much later as we do now!), we’re going to proceed like any other professional organization would.

“For financial/legal responsibility:
We’ll sign a written agreement as to what the financial commitment for each of us will be, and we’ll have our lawyer (any one we both know and/or trust) look it over to tell us if it makes sense and is fair to both of us. We’ll sign on it, and shake on it!”

As for ‘who does the work’:
Write job descriptions for every function, no matter how small, including everything from sales to sweeping the floor, shipping to schmoozing, manufacturing and marketing. Print all the job descriptions succinctly on three by five file cards; put them out on the table and let everyone pick and choose the jobs they want and/or are good at. (Each of you will have your likes/dislikes and special skill sets presumably, or you wouldn’t be doing this as a partnership in the first place.) If you’ve written the jobs up in advance on the computer, you can copy all the functions chosen by each person and paste them onto a master sheet with each person’s name at the top of their list of jobs. Make sure everyone gets a copy, and post one on the wall. This way there’s no mistake about who’s supposed to ‘take out the trash’….’balance the books’ or whatever.

Sabine Schleese, ON

That would seem to be easily rectified — even though you are dealing with family and hope that everything goes well (just like in a pre-nuptial agreement) you have to protect yourself by at least putting the salient points into a legal contract.

Brandi Jasmine

First thing to ask yourself is why you feel compelled to enter into a business with someone you describe as leaving you “holding the bag”! If this is an established pattern there may be nothing you can do — except say ‘No, thank you.’

If you must go ahead, get a solid business plan or project plan down in paper that clearly defines duties, responsibilities and liabilities. Ensure that there are financial penalties for failing to live up to specific duties. Spell it all out. Don’t use your home equity to finance the business. Make sure that you set up a limited company so that only the assets of the business are vulnerable. Speak to a good lawyer and make sure the whole thing is tied up so that your home and future income are never placed at risk.

If your husband’s father will not agree to see the lawyer or sign an agreement, have another good long look at what you are risking. Your father-in-law may mean well, but you are pretty clear that you don’t trust him. Getting things on paper is only prudent, and it ensures that all sides have a clear understanding up front on how responsibilities and rewards will be shared.

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Originally appeared on PROFITguide.com