There are substantial issues to consider when contemplating granting ownership interests in a business to children who are not active in the business, as well as to children who are active in the business.  There are many ways in which issues can arise.

Children not active in the business may second guess the business decisions of the participating children in various ways.  Is too much income of the business being distributed as salaries, leaving the nonparticipating children with too little dividend income?  The nonparticipating children may also take the view that too much of the company profits are being reinvested in the company instead of being distributed as dividends.  Are the participating children taking too many business risks and risking the future of the company?  Are the participating children borrowing too much money on behalf of the business which is impinging on the ability of the company to make profit allocations and risking the long-term viability of the company?

If the nonparticipating children are unhappy with how the company is being run and have minority interests in the business, for a variety of reasons they may be in a difficult position to sell their interests.  As a result, they could feel trapped and resentment could grow between the participating and nonparticipating children.

Even if the participating and nonparticipating children fundamentally get along, conflict may nonetheless arise as the children’s spouses weigh in and express their opinions.

Depending on a business owner’s circumstances, it is not always feasible to simply provide that the participating children will receive the interest in the business, while the nonparticipating children will receive other assets, particularly if the business interest is the most valuable asset in the business owner’s estate.  However, depending on the circumstances, there can be creative solutions to address these issues even if the business interest is the most valuable asset in the estate.

To what degree have you developed an estate plan for your business and family that address these issues?  In developing a plan that is right for your business and family, you will want to consider administrative, relationship and financial issues and goals.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]