Active and Less Involved Children in a Family-Owned Business

One of the recurring issues that comes up for family-owned businesses is what to do if some of the children are actively involved in running the business while others are not. Most commonly this scenario arises when the owners or founders of the company want to treat all of their children equally despite their differing levels of involvement in the day-to-day running of the company. This can lead to serious problems for the family and its business, including demands by the previously non-participating children to have certain roles or job titles, make certain decisions, or receive compensation.

In the more than 20 years I have advised family-owned businesses, I have come to learn that the key members of the family, especially the family’s patriarch or matriarch, are surprised by the degree to which they can create a customized solution for their family.

Of the variety of strategies and techniques that can be used to address the needs of the business and the children, three are the most common:

Creating Different Voting Classes of Stock
This allows all the children to receive shares of the equity of the company while leaving day-to-day management of the company in the hands of the children who are actively involved in the business. One configuration is to divide the non-voting shares equally among all the children while concentrating the voting shares in the hands of the more active children.

Using Various Life Insurance Strategies
If there is a concern that the value of the business or the cash flow it generates won’t be sufficient to adequately provide for all of the children and other potential beneficiaries, various insurance policies can be put into place to help ensure that the children, especially the ones that are less active in the business, are taken care of financially.

Creating a Baseline Business Valuation
This involves valuing the business as of a particular date, and then creating a formula that will financially reward the more active children if their efforts cause the value of the company to grow. This allows a more or less equal distribution at the beginning, while recognizing that future ownership might not be entirely equal.

There are course other tools that can be used. As with many aspects of estate, corporate, and tax planning for family-owned and closely held businesses, the key is for the essential decision makers at the business to recognize that, working with their lawyer, they can get solutions that are customized for their specific situation.

If you have any questions or comments, I would love to hear from you.

Kevin Moore, Founder of Kevin J. Moore & Associates, is focused in the areas of estate planning, trusts and probate services with additional expertise in both domestic and international business transactions and tax planning and tax controversy representation for individuals and companies.