Here’s an interesting topic for a family discussion. Most families in business together will face this choice at some stage.

  • There might not be enough jobs in the business for every family member.
  • The talents of family members might not be what the business needs.
  • The career and life aspirations of some family members might be focussed on other activities.

Nonetheless, some families strongly believe that owners must work in the business and if they choose another career, they will not be allowed to own shares. The attraction of working owners is believed to be that it will help to avoid conflict between working and non-working owners, and especially resentment among the working owners that their efforts are profiting those who could not be bothered to help the business by the sweat of their brows.

However, a rule restricting shares to working owners can have unintended consequences. Family members who decide to pursue other careers and are cut out of ownership may feel they are also being cut off from the family, especially if the family business represents a significant portion of the family’s overall wealth.

Alternatively, they might decide to take a career in the family business in order to qualify for ownership, but feel they are of being bound by “golden handcuffs” and resent the fact that they were forced to give up on their career aspirations in favour of a job in the family business in order to become an owner.

Working and non-working owners can collaborate successfully in a family business like any other business, where owners provide capital and the workers provide the labour. All that’s needed are clear rules; for example a dividend policy for all owners and a remuneration policy for working owners that together make clear who gets what from the family business. It would also be worth clarifying if any decisions need to be made by working and non-working shareholders together, rather than just by the working owners, for example decisions that involve a significant risk to the family’s wealth or reputation.

The choice between working and non-working owners will affect the constitution of the company. If ownership is restricted to those who work in the business, the number of potential purchasers if shares come up for sale will be more limited than if non-working family members were allowed to buy shares. Also if ownership is to be restricted to those who work in the business, the personal wills of shareholders must not contain any bequest of shares in favour of someone who does not work in the business. If this is overlooked it can result in a distressing conflict between a deceased’s will and the company’s constitution prohibiting this transfer from being registered.

It is also necessary to consider what happens if a working owner leaves the business or when a relative joins the business. Do the former have to sell their shares and how do those who join the business acquire shares?

Some families use different classes of shares to try to address these scenarios. This involves separating voting rights and the economic rights in relation dividends. For example working owners control the votes and non-working owners are entitled only to economic returns. This means that the shares need to be reclassified every time someone joins or leave the business and it can unintentionally result in a small group of working owners having disproportionate voting power when you consider that every shareholder has an investment in the business.

It is important that enterprising families are aware of the pros and cons of the different models of ownership. The family needs to decide where it stands so that they have the owners they want and that the rules governing ownership are right for their family and their business.

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