Ownership Restrictions, Risk and Team Considerations in Family-owned Businesses

Abstract

At the start of a new business both team and risk aspects have to be considered in the choice of business form. The partnership form offers advantages in terms of team considerations while the corporate form provides limited liability which provides a way to handle the risk problems associated with owning a firm. The advantage of having a well synchronized team is important for many new firms and especially for cases where family relations are considered important. Seen from that angle the partnership form should be opted for. But risk is high up in the mind of founders. Events might unfold in an unexpected way and in the process the economy and well being of the family is at stake. The corporate form with limited liability is in this sense a very attractive choice that is commonly chosen. But with the corporate form comes transferability of ownership of shares without consent of other owners. The shareholder team might therefore change in an unexpected and unwelcome way. Therefore it is important to consider different types of transfer restrictions when a new corporate form of business is started. This aspect has not been much considered in practice and in the entrepreneurship literature. An accountant or a lawyer often has to remind an entrepreneur of the importance of stability in ownership positions. In the paper we attempt to ascertain whether it is possible to foresee future complications and thus prepare already at the start of the business. The paper combines law and economics analysis of the different transfer restrictions found in various legal systems. The paper was presented at the Seventh AGSE International Entrepreneurship Research Exchange, Feb. 2-5 2010, University of the Sunshine Coast.