Sharing your family business profits fairly

The allocation of profits from a business among its owners typically reflects their overall contributions to the business, including contributions of both human and financial capital. However, in a family-owned business the situation may not be quite that 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. How can the owners evaluate the economic contributions of different family members, if that is a consideration?

Family business owners must also consider whether an individual family member’s unique economic needs should play any role in making those capital allocation decisions. For example, if family members need significant income from the business to sustain a lifestyle or deal with an unexpected event, it may be more likely that the family business will be harmed over time through unsustainable compensation to certain family members, perhaps financed by borrowing or deferring capital expenditures. Having “owner need” rather than “company performance” drive firm economics is usually not sustainable over the long run (and sometimes not over the short run, either).

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