‘Keeping it in the Family’: The Risks

Family-run and owned businesses are common; with the trust and dependency of family members/employees working together to create a strong business team. However, there are some financial issues that can place strain on these familial relationships when in business together. In this article, we shall explore these issues.

The Government runs a Fair Entitlements Guarantee (FEG) Scheme aimed at ensuring employees of insolvent entities are paid most of their outstanding entitlements. However, when employees are relatives of the director, they are excluded from the scheme. The reason for this is the knowledge, relationship and benefits that a related employee often receives working for their family.

The Corporations Act 2001, provides that when a dividend is available in liquidation, employees have a priority status in being paid the dividend before other creditors. However, for the director’s relatives, this priority is limited to $2,000 for wages and superannuation, and $1,500 for leave entitlements. Any outstanding employee entitlement above these limits ranks as an ordinary, non-priority unsecured creditor claim in a liquidation.

Further, there are many cases where family members in employment roles are not qualified for their jobs. Quite often, these employment roles relate to business accounting. This can place the business in a bad situation with poor financial control and record-keeping for employees who are completely unsuited and unqualified for their positions.

Directors duties and liabilities is the final issue to consider when ‘keeping it in the family’. If insolvency occurs, close family relationships can break down and have a conflict of interest situation arise for the directors. Shadow director claims can also be supported by a familial presence at meetings and for important decisions.

Keeping it in the family can involve risks but it also can be a good idea. To discuss your options in business, please contact our team at the Quinn Group.

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