Family businesses are among the most common types of companies. However, implementing governance practices and determining the appropriate structure for such businesses is a challenge many find difficult to accomplish. A frequent question arises: “What is the proper way to govern family businesses, and what is the suitable structure for them?” To answer this question, we present the following:

First: Definition of Family Businesses
Family businesses are those that are wholly owned or controlled by a specific family, typically through majority ownership of shares or stakes in the company.

Second: Mechanism of Family Business Governance
Corporate governance can be defined as a set of rules for directing and controlling a company. It includes mechanisms that regulate the relationships between the board of directors, executive managers, shareholders, and stakeholders.

Governance of family businesses involves establishing policies and procedures that ensure clear communication between partners, board members, and executive directors. This helps guarantee transparency, business continuity, and risk management, ultimately benefiting the family members, increasing profitability, and ensuring the sustainability of the business.

Governance of family companies requires a Family Charter, which can be defined as:
A written document that regulates formal and familial relationships among family members, and governs ownership of the company according to agreed-upon terms among the owners. It is enforceable and binding in the event of disagreements among current partners or their heirs in the future.

The Family Charter plays a significant role in corporate governance and long-term sustainability. Article 11, paragraph (b) of the Saudi Companies Law states:
“Founders, partners, or shareholders—either during the formation of the company or afterward—may: (b) enter into a family charter that regulates family ownership, governance, and management of the company…”

This indicates that the charter includes key provisions regarding family ownership and serves primarily to outline solutions for potential conflicts between current and future shareholders or heirs. It also addresses expected disputes that might arise after shares are passed on from the founding generation to their descendants, helping prevent undesired interpretations or divergent interests by establishing clear, binding governance structures.

Importantly, the law does not limit the scope of what can be regulated in the family charter, providing flexibility in adapting it to the family’s needs and ensuring the company’s growth, stability, and continuity in line with its founding goals.

Third: What Is the Suitable Structure for Family Businesses?
The Saudi Companies Law specifies five types of legal company structures. Family businesses may choose any of these based on their specific needs and goals.

To determine the most appropriate legal structure for your family business, we are happy to assist you in evaluating your options and providing tailored guidance.