Normally, business owners will plan to leave their family business to, none other than, their children. But if you have more than one child, the common challenge that you have to deal with is how to divide business shares. It’s possible that if you divide the business shares equally among your children, you’ll be making it hard for them to reach a business decision since everyone is an equal owner and each may have a different opinion. Therefore, it might make sense to devise a plan where only one ends up with control.
For this reason, you may think of appointing, for example, your son to be the boss of the family business by leaving him a controlling share. While your attempt has merit because you have made it impossible for your son and daughter to deadlock over any business decision, you have also laid the foundation for potential problems.
If your son is boss, your other child/children may never receive any business profit. As the major shareholder or equity owner, your son can devise a plan to make it appear that no profit is available for distribution to the other shareholders.
Making your son the boss may also aggravate other business conflicts. Though you leave your daughter with a minority interest, she can attempt to equalize the power by threatening to litigate every business move your son makes. She can sue to compel liquidation, sue to demand and receive dividends, and can ultimately devastate the business through countless lawsuits challenging your son’s business decisions every time.
If you are now wondering what should be the best method of leaving the family business to your children considering all that could go wrong, you may want to consider the following options to help make the distribution more equitable:
Leave the Business to One Child
You can eliminate the deadlock entirely by leaving the business to one child and your other assets of similar value to your other child. If you have insufficient assets to equalize, consider buying life insurance to be owned by the child who will not receive the business. When you die, the child will receive cash death benefits roughly equal to the value of the business.
If this plan is not feasible, you may have to resort to the next option…
Leave the Business Equally, Subject to a Dispute-Resolution Plan
If you feel you must leave the business to all your children, leave it to them equally. When the power is shared among all your children, no out-of-power child can gum up the works.
Of course, this plan puts you right where you started. With both children as the boss, there could be conflict and deadlock over every business decision. This is why you must provide a detailed and articulate formula for dispute resolution in your estate plan. It may be arbitration, mediation, majority rule, or decision by an independent third party who has a concern for the family and the business.
If you want an extreme method to prevent sibling conflict over the family business, provide that the business should be managed and operated by an independent Board of Directors, who are your most trusted confidants, and none of whom are your children. You could further provide that the Board’s decisions cannot be challenged or overturned by any child no matter what the child’s shareholder or equity position is.
Whatever the formula, leaving precise business succession instructions on how to resolve deadlock is often the salvation of the business when it gets into the hands of your children.
The bottom line is that without an estate plan in place providing such instructions, your family business may face the ultimate resolution: dissolution. Our experienced Tampa estate attorneys can help provide smart strategies for leaving your business to your children. Call us at (813) 438-8503 to schedule a consultation, and we’ll help you explore your options.