Why Minnesota family businesses need more than a handshake, and what to put in writing
Going into business with a family member in Minnesota can be one of the best decisions you make, or the one that ends Thanksgiving dinners for a decade. The difference usually isn't how well you get along. It's whether you decided, in writing, who owns what, who decides what, and what happens when someone wants out.
A recent Wall Street Journal essay makes the case well without meaning to. Writer Bob Brody describes joining his daughter's public relations business. He works part-time, unpaid, and calls her his partner. It's a warm story about two people with very different working styles learning to respect each other. From a business lawyer's chair, it's also a story with a lot of unanswered questions.
Can you accidentally form a partnership with a family member in Minnesota?
Yes. Under Minnesota Statutes section 323A.0202, two or more persons who carry on a business for profit as co-owners generally form a partnership whether or not they intend to form one, unless the business is organized under another applicable entity statute. A person who receives a share of the business’s profits is presumed to be a partner unless the payments fall within a listed exception, such as wages, compensation for independent-contractor services, rent, repayment of a debt, or loan interest. Under section 323A.0306, general partners generally are jointly and severally liable for the partnership’s debts and other obligations.
Families use the word "partner" loosely. The law doesn't. If a parent and adult child both put time and money into a business and split what comes out, a court may treat them as partners regardless of whose name is on the website.
That matters in two directions. A family member you thought of as a helper may claim an ownership stake. And a family member who thought they were just helping may find themselves on the hook for business debts.
Forming an LLC and signing an operating agreement settles the question. The LLC is the business, and the agreement says who owns it.
What should family business owners decide before they start working together?
Decide four things in writing before you start:
- Who owns what percentage
- Who has authority to make which decisions
- How each person gets paid, and
- What happens if someone leaves.
Family members tend to skip these conversations because they trust each other. That trust is exactly what makes the eventual disagreement so painful, because no one can point to what was agreed.
Brody says he does about 20% of the work in his daughter's business. Is that 20% ownership? A salary? Nothing at all? They seem happy with the answer for now, but the essay never says what it is.
That's typical. A parent who helps "for now" ends up working there five years. A sibling who invested $30,000 at the start assumes it bought equity, while the founder assumes it was a gift. Neither is lying. They just never had the conversation.
Can a family member work for your business for free?
Usually not without risk. Federal and Minnesota wage laws generally don't let people volunteer their labor to a for-profit business, and family ties don't automatically create an exception. An unpaid family member may also later claim they were really an owner. Decide whether the helper is an employee, an independent contractor, an owner, or an informal advisor, and document it.
The unpaid parent who pitches in is one of the most common setups in a small family business. It feels generous. Legally, it's a gray area.
You need to choose: if your father is advising occasionally, that's one thing. If he's on client calls and drafting pitches every week, he's doing a job, and the business should treat it like one.
What happens when family business partners disagree?
Whatever your operating agreement says. If it gives one owner final say over client decisions, that owner decides. If it says nothing, Minnesota's default LLC rules decide, and those may not match who actually runs the business. A deadlock between two equal owners can paralyze the business, so build in a tiebreaker before you need one.
The most telling moment in Brody's essay is a client complaint. He wanted to meet the client face to face. His daughter handled it by email. The client left, and the two of them still see the reason differently.
In a one-person shop with an unpaid advisor, the owner simply decides, and that's the end of it. Now imagine they each own half. Every disagreement like that becomes a standoff with no way to break it.
A good operating agreement says who has the final word on what. Maybe one owner runs client relationships and the other runs finances. Maybe major decisions need both. Either works, as long as it's decided before the argument.
What happens if a family member wants out, gets sick, or dies?
Without a written agreement, the answer is usually a fight. A good operating agreement sets buyout terms, including how the business is valued and how payments are made, and says what happens to an owner's interest at death or disability. It also addresses who keeps the clients. For family businesses, these terms belong alongside each owner's estate plan.
Family businesses have a built-in succession problem. When a parent and child work together, the parent's ownership interest will pass to someone at death. If the will leaves everything equally to three children, two of them may suddenly own part of a business they've never worked in.
The fix is coordinating the operating agreement with each owner's estate plan. Buy-sell terms say who can own the business. The estate plan makes sure the right person ends up with it.
Why does a family business need an operating agreement?
An operating agreement turns a family's unspoken understandings into enforceable rules. It sets ownership, authority, pay, decision-making, and exit terms, and it overrides Minnesota's default rules where the owners choose. For family businesses, it does one more thing: it lets relatives disagree about the business without turning every disagreement into a referendum on the relationship.
Brody and his daughter already have house rules. They don't talk business at the family dinner table, and she's free to disagree with him as much as she likes. Those are good rules. An operating agreement is the same idea, written down and enforceable.
Put the handshake in writing
Working with family can deepen the relationship, as Brody's essay shows. The families who keep it that way are the ones who decide the hard questions while everyone still gets along.
I work with my clients to form LLCs and drafts operating agreements for family-owned businesses across the Twin Cities, on a flat fee. If you're starting a business with a relative, or you've been running one on a handshake, schedule a consultation and we'll put the deal in writing.
