Taking over the Family Business?? Understand The Risk!
Family members must understand the responsibilities and risks associated with becoming directors of a family-owned corporation.
Know What You’re Getting Into
Incorporation of an owner-managed business requires shareholders to elect a board of directors to assist in managing the affairs of the company. The owner-manager will almost certainly be elected as well as a member of their family. In many instances family members allow themselves to be elected director simply because they want to help keep family control of the business. Unfortunately, all too often these family members have little business experience and only a minimal understanding of the onerous responsibility and contingent risk that the position of director carries with it Regular review of accounts receivable will show how many clients are now extending payment terms or asking for higher credit limits. By regularly monitoring the tightening credit terms of suppliers and the demands for better terms by customers, the alert owner/manager will be aware early that a cash flow problem may be building.
Be Aware of Personal Liability
Perhaps the most important area for inexperienced directors of an owner-managed business is Section 122. For instance, directors may be held accountable if they fail to ensure that a corporation maintains proper books and records or fails to file required forms or make payment to regulatory authorities (all of which would be done by a reasonable and prudent individual). It may come as a surprise to many that directors can be held personally liable for breaches of duty in such areas as mismanagement of corporate assets, financial losses, wrongful dismissal, employee discrimination or failure to address environmental issues for which the company could reasonably be held responsible.
The role of director in a company, regardless of its size or province of incorporation places a burden of responsibility that most owner-managers are not aware of. It is incumbent upon directors to be aware of:
- the risk of negligence and the potential liability of all directors or other officers of the corporation;
- the need to insist that they are provided with all pertinent information they require to oversee the operations of the corporation;
- the statutes and regulations that the company is obligated to follow;
- the financial condition of the corporation at all times;
- the need to avoid any conflict of interest. A director should have no task outside their responsibility as director that could interfere with their responsibility to the company;
- the need for rules and guidelines within the corporation to ensure confidentiality of not only all corporate documentation but all information concerning employees;
- the need to document the information used and the process of how major decisions were arrived at;
- the need to use corporate legal counsel in contentious situations to demonstrate that due care and diligence were exercised before the decision was made;
- their obligation to understand the operations of the corporation and to participate and communicate with management on all matters of corporate significance regardless of whether a director agrees or disagrees with the activities of management.
Get Legal Advice
The ownership and the directors and officers of family-owned businesses are usually one and the same. As such there is minimal risk of disgruntled shareholders taking the directors to task. However, outside entities, whether regulatory bodies or third parties, may not be so obliging. When family members are directors the corporation may have trouble convincing authorities that objectivity, confidentiality and corporate governance are not tainted by non-arm’s length relationships among family members. If you are invited to become a director of a corporation owned by members of your family, get legal advice before agreeing to stand for election. In the long run, it is in the best interests of both you and the company to meet with your lawyer and discuss the best means of protecting the business and the family from both corporate and personal loss.
Soheil’s broad experience extends to various sectors and industries, including professional services, technology, manufacturing and distribution, entertainment, publicly traded entities, and not-for-profit organization, with working knowledge of U.S. GAAP and International Financial Reporting Standards.
Soheil provides advisory services in such areas as due diligence and litigation support, and provides consulting services to other CA firms with respect to engagement quality control reviews, IFRS conversions, and cyclical monitoring. Soheil has served as a part-time inspector with the Institute of Chartered Accountants of Ontario and is now a seminar leader at the School of Accountancy.