Law Briefs Featured

10:02am EDT July 22, 2002

According to the U.S. Small Business Administration, 90 percent of all businesses in the nation are family owned. As such, this vital part of the economy should be more carefully nurtured.

Unfortunately, statistics show that most family-owned businesses do not have secure futures. The chances of successful passage from the first generation to the next are slim; just three out of 10 family businesses survive the transition. Of those that do survive, only half will continue as viable business entities into the third generation of the family.

While the type and size of the businesses and the relationships among family members differ, the challenges faced by the owners of family businesses often are similar.

Notwithstanding such challenges, two goals predominate in the world of business: success (i.e. profits) and control. Staying focused on these goals where family members are concerned can be difficult or even impossible. And the resulting stress can tear apart both the family and its business. Despite the added stress and complexity of dealing with family members, the ability to stay focused on the goals of success and control often determines whether the family business will survive and succeed.

Longstanding friction among family members often manifests itself in confrontations over titles, salaries, responsibilities, decisions to enter new businesses and investments. These are vital business decisions that should be based on what will be most beneficial to the business-not on extraneous factors such as the ages of siblings, hurt feelings or social goals.

Yet family disagreements often simmer for years, erupting when a business is at one of these crossroads:

  • When the original owner/entrepreneur decides to pass on the company to the next generation.

  • When ownership interests become more diverse among family members.

  • When ownership or control of the business is transferred out of the family (feuds often erupt over the distribution of sale proceeds).

    In addition to bringing in a third-party mediator to oversee disputes, you can take steps to minimize the consequences of family-induced business problems. Consider the following:

  • Make certain that decisions about the future of the company are made early, not late. The principal owners must make firm decisions about who their successors will be and when they will take control.

  • Document all corporate actions to reflect explicitly the intentions of the owners.

  • Seek outside input into the corporate decision-making process. Like public companies, the board of directors of family-held corporations should include outsiders who can see beyond family-based perceptions and help keep a company on track.

  • Integrate each family member/owner's personal finances with their business finances to safeguard their financial interests.

  • Ensure that during key transitions, each family member has his or her own lawyer to advocate potentially divergent positions.

Still, when all is said and done, the best way to keep a family business viable and avoid irreparable missteps is to make decisions based on the best interests of the business. Maximizing the business's potential while dealing fairly with family members will serve everyone's interests in the long term. However, no one's interests are served if, at the end of the day, there is nothing left to fight over.

The complexities of COBRA coverage

COBRA insurance continuation coverage of an ex-employee cannot be terminated when the employer learns that the ex-employee was covered by his spouse's or other medical insurance at the time the employee elected COBRA coverage.

The U.S. Supreme Court held that an employee's coverage under COBRA, or the Consolidated Omnibus Budget Reconciliation Act of 1985, may be terminated only when the employee first becomes covered under another medical plan after electing COBRA coverage. Insurance coverage that was in place when the employee left the job or elected COBRA doesn't disqualify him from continuation of COBRA coverage. The same rationale would appear to apply to employees who are entitled to Medicare benefits at the time they elect COBRA.

COBRA allows some employees the right to continue health insurance coverage through their former employers. However, employees must pay the full cost of this coverage. According to federal law, businesses with 20 or more employees must offer continuation of their group health plan for at least 18 months to employees who voluntarily left the company, who were laid off or whose hours were reduced so as to not qualify for insurance.

Law Briefs is compiled by attorneys from Eckert Seamans Cherin & Mellott, LLC, a national law firm based in Pittsburgh.