Family Business Disputes: Siblings, Parents and Ownership Fights

Same law, harder facts

Texas has no separate body of family business law. A company owned by siblings is an LLC, a corporation or a partnership, and chapters 101, 21 and 152 of the Business Organizations Code apply exactly as they would to strangers. The difference is evidentiary and emotional. Family companies are more likely to have no written agreement, stock that was never issued, capital accounts nobody kept, a founder who said different things to different children, and an in-law whose divorce suddenly matters. The law supplies default answers for all of it; the answers are often not the ones the family assumed.

Who owns what when nothing was written down

Three situations recur.

The founder 'gave' shares or interests orally. Ownership of an LLC interest or corporate stock is proven by the company's records, tax returns and the parties' conduct, not by recollection of a dinner conversation. K-1s and Schedule K reporting, Secretary of State filings, minutes, and who signed loans as owner carry the weight. Where a parent and child, or two siblings, ran a business together with no entity at all, the question becomes whether a partnership was formed by conduct under section 152.052: sharing profits, expressing intent to be partners, sharing control, sharing losses and contributing property. That analysis is in whether a handshake business is a partnership in Texas.

One sibling worked in the business, the other did not. Sweat equity is not ownership unless it was agreed to be. The sibling who ran the company for 15 years at a modest salary may have a claim for unpaid compensation or for the value of services conferred, but not automatically to a share of the company. Conversely, the sibling who owns shares but never worked keeps the shares; ownership is not forfeited by absence.

Interests passed at a death. When a member of an LLC dies, section 101.1115 makes the heirs and the surviving spouse assignees of the interest, entitled to distributions and information but not to vote or manage, unless the company agreement provides otherwise or the other members admit them. Children who inherit a parent's 60 percent may find they inherited the economics and none of the control. The mechanics, and the divorce rules, are in what happens to an LLC interest on death or divorce.

The sibling who runs it

The most common family dispute is the one every closely held company has: an insider sets his own pay, hires his spouse and children, runs personal expenses through the company, and declares no distributions, while the siblings who own the rest receive K-1s and tax bills. The law here is ordinary fiduciary law. A manager who sets his own compensation without the approval the agreement requires, or transacts with the company through entities he owns, is self-dealing, and the burden of showing fairness falls on him. Reasonable compensation for services is permitted (section 101.206(f) excludes it from 'distribution'); the excess is a distribution that should have been shared. The analysis, with an example, is in when the company is profitable but you receive no distributions.

Spouses and divorce

Texas is a community property state. Under Family Code section 3.003, property possessed by either spouse during or on dissolution of the marriage is presumed to be community property, and the spouse claiming it as separate must prove that by clear and convincing evidence. Shares or interests a family member received by gift or inheritance are separate property, but income from them during the marriage, growth attributable to the owner's labor, and interests acquired with marital funds can be community. On divorce the court divides the community estate in a manner it deems just and right (Family Code section 7.001). An interest awarded to the non-owner spouse makes that spouse an assignee of an LLC interest (§ 101.1115) or a transferee of a partnership interest (§ 152.406): economic rights only, no vote. Shareholders' and company agreements commonly address this with a buy-back right on divorce, which the Code expressly preserves (§ 101.1115(b)).

The founder's death and the fight over succession

Promises about who will 'get the business' are enforceable only to the extent they were reduced to a will, a trust, a buy-sell agreement or a transfer that actually occurred. Absent those, the interest passes under the will or by intestacy, and the heirs become assignees. Disputes about the estate itself, including whether the founder had capacity or was unduly influenced when a late amendment favored one child, belong in probate court under the Estates Code; the Texas Business Court expressly excludes Estates Code and Family Code claims (Government Code section 25A.004(g)). Disputes about how the company is being run after the death belong in district court under entity law. Families often need both, coordinated, which is one of the real complexities of these cases.

Example

Suppose a Dallas family owns a distribution company as an LLC with no written agreement beyond a one-page certificate of formation. The father, who held 100 percent, dies leaving his interest equally to three children by will. The eldest has run the company for a decade and continues to do so. He treats his siblings as passive, pays himself $400,000, adds his wife to payroll, and makes no distributions. Each sibling holds a one-third interest; because the LLC had a single member who died, section 11.056 required the successors to agree to continue the company and become members within a year, which they did by conduct and by filing as members. As members, the two siblings have records rights under section 101.502, a claim that the compensation and the spouse's salary are disguised distributions, and, if the eldest refuses to engage, the receivership and winding-up remedies in sections 11.404 and 11.314. What they do not have is a right to run the company; that would take a vote of the members under the default rules.

How these cases are usually resolved

1. Information first. A written records demand under section 101.502 (LLC) or section 21.218 (corporation) establishes the facts and signals seriousness without filing suit.
2. A letter, then a meeting. Families often settle on a structure, a buyout of the passive owners, a shareholders' agreement that fixes compensation and distributions, or a sale of the company, once the numbers are on the table and a lawyer is in the room.
3. Mediation. Confidential, and suited to disputes where the parties will be at the same holiday table afterward. How it works is in what business mediation is and how it works.
4. Litigation. Claims for breach of fiduciary duty and of any agreement, an accounting, derivative claims treated as direct under the closely held provisions (§§ 21.563, 101.463), and where warranted a receiver or judicial winding up.

What it costs the family

Litigation between relatives is public unless sealed, and it is permanent in a way commercial disputes are not. The pleadings describe a sibling as a thief; the depositions put a parent under oath about what was promised. Experienced counsel in these matters pursue the records and the money with the same rigor as in any case, but they also sequence the steps so that the family can stop at a buyout or an agreement without a trial if it chooses to. Confidentiality tools, including protective orders and sealed filings, are discussed in keeping a business dispute confidential.

Deadline

Claims for breach of fiduciary duty must be brought within four years under Civil Practice and Remedies Code section 16.004. Family claims tend to be old, because people wait, and each year's excess compensation or missed distribution is a separate accrual. Estate contests have their own, often shorter, Estates Code deadlines that run from probate events, not from discovery of the problem.

When to involve a litigator

Before the family meeting at which someone intends to 'lay it all out.' What is said there will be quoted later. A litigator can identify which claims exist, which court they belong in, and what a realistic resolution looks like, so the family conversation happens with the law already understood. Tina Wysk represents family members on both sides of ownership, compensation and succession disputes in Dallas state and federal courts.