Directorship in Family Enterprises: Know the Legal Ground You’re Standing On

Joining the board of a family-run business might seem like a natural next step—an honourable way to give back, stay connected, or carry on a legacy. But many new directors underestimate what they’re walking into, mistakenly assuming that being part of a family operation somehow comes with fewer risks or looser rules.

That assumption can have severe consequences—not just for your finances, but for your freedom and your family ties.

In Australia, the legal duties of a director apply equally, whether you're leading a listed corporation or a modest family firm. You may be held personally responsible for decisions made while you're a director, even if you’re unpaid, inactive, or simply “doing a favour.”

Here are three illustrative examples—drawn from real-world scenarios—that reveal the risks and highlight what should have been done differently.

Scenario 1: Ignoring Financial Reality – “It’s What Uncle George Would Have Done”

Lewis joined the board of his family’s long-standing civil engineering company. As the business struggled, he and his relatives—most of them fellow directors—chose to carry on trading, hoping that a large upcoming contract would turn things around. “We owe it to our parents to keep it going,” was the consensus.

But good intentions didn’t shield them from legal exposure.

The business was clearly insolvent, and the directors had sufficient information to be aware of this. ASIC stepped in, and Lewis, along with others, was found in breach of director duties by allowing continued trading during insolvency. They were held personally liable for part of the debt.

Key Takeaway: Sentiment doesn’t override statute. Directors must act in the best interests of the company—even when that means making unpopular or painful decisions within the family.

Scenario 2: Workplace Tragedy – “We’ve Never Had an Issue Before”

Sandra recently became a director in her family’s logistics business. Her uncle, the founder, brushed off her concerns about safety processes. “We’ve been doing this for 20 years without a problem,” he said. “No need to complicate things.”

But their casual approach came at a high cost. There were no formal safety procedures in place—no training, no documentation, no risk management plan.

A teenage worker was killed when struck by a forklift operated by an unlicensed staff member. Authorities launched a manslaughter investigation. Despite not being involved in operations, Sandra faced the real possibility of criminal charges as a director who failed in her duty to ensure safe systems of work.

Key Takeaway: Size or informality doesn’t exempt anyone from health and safety laws. Directors have a legal obligation to implement and oversee compliant, safe work practices.

Scenario 3: The Unwitting Director – “It Was Just a Formality”

When Dominic launched a catering venture, he listed his wife, Rachel, as co-director—partly for moral support, partly as a gesture of shared commitment. Rachel had no involvement in operations and never made a business decision.

Years later, the business was sued for underpayment of staff. Despite her non-involvement, Rachel was named in the lawsuit. As a legally registered director, she shared full liability.

They believed the family home was secure because it was in Rachel’s name and she wasn’t “really involved.” But by listing her as a director, they inadvertently exposed her assets. The house was ultimately used to settle the claim.

Key Takeaway: Being listed as a director carries full legal responsibility, even without active involvement. Asset protection requires deliberate planning, not symbolic gestures.

Thinking of Saying Yes to a Family Board Seat? Start Here:

Governance Basics

• Obtain a Director ID (DIN)

• Review key governance documents: constitution, board rules, shareholder agreements

• Understand director obligations under corporate, workplace and industrial relations law

  
  

Safeguard Your Assets

• Structure ownership with legal guidance (e.g. discretionary trusts)

• Arrange or update director liability insurance

• Avoid “passive” roles—understand that being a named director is never symbolic
  

Compliance Checkpoints

• Confirm legal compliance in WHS, payroll, taxation, licensing and environment

• Implement formal risk and governance frameworks, even in small teams

• Consider professional development (e.g. governance courses)

• Schedule regular legal and financial audits
  

Bottom Line: Family Ties Don’t Cancel Legal Ties

Serving as a director in a family business is a mark of trust—but it’s also a legal position with serious obligations. Regulators assess your conduct, not your closeness to the founder or your intentions.

If you want to honour your family’s legacy, start by protecting it—govern wisely, seek advice early, and never assume that “family” means safe.