Bass, Berry & Sims attorney Richard Spore authored an article for Family Business Magazine offering solutions for challenges faced by family businesses when considering how to distribute profits among family members ranging from passive to highly active in the business.
The allocation of profits from a business among its owners typically reflects their overall contributions to the business, but a family-owned business may not be quite as simple. “For example, in family businesses, the owners may have to balance economic contributions against their status as family members when allocating the company’s economic results,” Richard said. “How can the owners evaluate the economic contributions of different family members, if that is a consideration?”
Additionally, business owners may also consider whether an individual family member’s unique economic needs should play a role in making capital allocation decisions, such as if one member needs significant income from the business to deal with an unexpected event. There’s also the issue of contributing capital to the business when needed – how does an owner decide which family members should be financially responsible to provide funds.
To help address these challenges, Richard provided five solutions to consider:
- Compensate performance, not need.
- Reward what you can measure.
- Separate the business into different divisions, which allows for different profit centers.
- Have clear exist strategies for passive owners.
- Align risks and rewards.
The full article, “Sharing your Family Business Profits Fairly,” was published by Family Business Magazine on July 16 and is available online.