It’s the knotty problem that can unravel a family enterprise; what’s the fairest way to apportion interest in the family business, when some family members work in it while others have pursued independent careers? Do you divvy up interest equally to each, regardless of their involvement? Or do the family members who work in the company deserve the rewards?

 

Often, it’s the parents who have to make this Solomon-like decision, and it can threaten family relationships. Family values typically say “equal is fair.” But enter the business setting and the issues and the values become more complex. A further complication is the financial and tax impact on the parents in transferring the business ownership to their kids to save estate taxes. Might that leave them dependent on their children?

 

What should the family do?

 

1. Agree on criteria. What does “fairness” really mean? If there are four kids to be considered, and the business is seen as four cookies on a plate, does fairness mean one cookie for each child? Or does fairness dictate that the hungriest gets more, and that the children most capable of earning for themselves get less?

 

2. Call on the pros. Top-notch legal, accounting, and insurance advice can often make the difference between a good plan and a great one. Call a team together, treat them like your “board for a day,” state your shared goals and criteria, and wrestle with the options.

 

3. Separate the parts. There are three components to a change in ownership in a family business: changes in control, income, and retained earnings. Depending upon the goals and needs of both the family members and the business, these can be addressed separately. One group can have control while the same or another receives income and another accumulates retained earnings. It is possible, for example, for Mom and Dad to maintain voting control while having retained earnings accrue to the children who work in the business. This option can influence estate taxes and reward those who work in the business. Likewise, it is possible for children who don’t work in the business to be gifted a fair share of the previously retained earnings at a predetermined value prior to the significant contributions of their siblings.

 

4. Consider all assets. Most of Mom and Dad’s assets appear to be tied up in the business. But what about real estate, savings and investments, and life insurance?

 

5. Put yourself first. Mom and Dad’s first obligation is to protect themselves and to ensure that their future is provided for so they can maintain independence.

 

6.Explore all options. Talk with other family business owners. Attend seminars and workshops. Read. A paperweight on my desk says, “No one can take the ultimate weight of decision-making off your shoulders. But the more you know about how things really are, the lighter the burden will be.”