Does Your Family Business Need a Family Constitution?
November 16, 2020
A Family Constitution is a written document agreed to by members of a family who are also owners of a business. It defines the relationship of the family members to the business and to each other. While it is not necessarily legally binding, it is a best practice for those companies who wish to avoid the intra-family squabbles and pitfalls that are unique to family business enterprises.
The main purpose of a Family Constitution is to help establish a shared vision for the family business and to establish boundaries between family members in their different roles. In a family business, a person can have multiple roles that can include: (1) a family member; (2) an owner of the business; (3) a manager of the business; and (4) a non-manager employee of the business. A family constitution can create fairness, equality and transparency among family members by establishing the criteria and expectation for family members who want to work or manage the business versus family members who just want to be owners. Furthermore, a family constitution can further family harmony by setting rules for how a person acting in one capacity, say as a family member, interacts with a person acting in a different capacity, say a manager of the business.
There is no one method for creating a family business constitution. What makes good sense for one family business could be wrong for another family business, so the constitution is generally unique to each family. Templates or constitutions prepared for other family businesses are only useful for providing ideas as to what can be included and potential solutions to the various issues. Creating a family constitution is really a process the family goes through examining the various aspects of their relationships. The most important thing is that there is consensus on the constitution and there is a buy-in from the family members.
If you have an interest in exploring whether a family constitution is right for your business, contact us online or call (412) 338-1169.