How do you fairly divide up the interest in the family business between those family members who continue to operate the business and those that have chosen other directions?

Many family businesses, particularly those in agricultural industries, have attempted to answer the question by dividing up the business’ hard assets.  For example, the real estate might be owned by the non-participating family members, while the active business is separately held by those who have chosen to continue the family legacy.  This way, the land is leased to the business and the non-participating members receive the constant value from the lease payments, but the participating family members receive their value from the operations of the business and have an opportunity to participate in its growing success.

However, there is another way to divide up the interests that gives a family much more flexibility than divvying up hard assets, but is rarely used – issue two or more classes of stock!  Any tax-paying corporation has the ability to issue different classes and series of stock with different economic and management properties.  Under corporate law, these classes and series of stock can have any number of attributes:

  • They can entitle the holders to payment of regular dividends. 
  • They can entitle the holders to a first position to receive any funds if there were ever a sale.
  • They can be voting or non-voting.  If voting, they can have one vote per share or a thousand votes per share.
  • They can guarantee the holders a representative on a board or other decision making group.

The economic and management variations are endless!

If a family has two or more sets of members who have differing roles within the family business, this is an incredibly flexible means of allocating their respective interests.  Those different sets of family members could be those participating and non-participating in the business, the older generation and the younger generation or the direct familial lines of different founding siblings.

Remember, however: it is always important to consult a tax advisor, in addition to an attorney, to make sure there are no adverse or hidden tax consequences, either to the business or the individual holders.