27 Apr The Quiet War Inside Your Family Business: When Some Family Members Work There and Others Don’t

Two siblings own equal shares of the family business. One works sixty-hour weeks running operations. The other lives in another state and has never set foot in the warehouse.

The one who works draws a salary of $400,000. The one who doesn’t receives nothing.

Both own exactly 50% of the company. And both believe, with absolute certainty, that the arrangement is unfair to them.

This is the most predictable, and most destructive, conflict in family business succession planning. It happens in many family-owned companies that survive into the second generation. And it has destroyed more family businesses than recessions, bad markets, and competitors combined.

How the Problem Develops

In the early days, the founder runs everything. Compensation decisions are simple because there’s only one decision-maker. Children may be given ownership interests for estate planning purposes.  This is a smart move from a tax perspective.  But no one thinks much about what happens when some of those children work for the company and others don’t.

The tax structure makes it worse. In most family businesses, the company pays salaries to the family members who work there. Salaries are tax-deductible. Dividends, distributions to all owners, are not. So the family’s advisors, quite rationally, recommend maximizing salary and minimizing dividends. The working family members get paid. The non-working family members get nothing.

On paper, the non-working siblings still own their shares. Their ownership stake appreciates as the company grows. But appreciation doesn’t pay mortgages. It doesn’t fund college tuition. It’s wealth on paper and nothing in the bank.

The Resentment Builds from Both Sides

The working family members feel they’re doing all the work while the non-working members reap the benefits of ownership. The non-working members feel they’re being deliberately excluded from the economic value of an asset they own. Both sides are right. And both sides dig in.

I’ve seen working siblings try to intimidate non-working siblings into selling their shares at a discount. I’ve seen non-working siblings threaten lawsuits to force distributions. I’ve seen families that hadn’t spoken in years because a compensation dispute from a decade ago was never resolved.

The longer it simmers, the worse it gets. Perceived unfairness doesn’t diminish with time. It compounds.

Transparency Is the First Step

In the most functional family businesses I’ve worked with, compensation and financial decisions are open to all owners.  Not just the ones who work there.

This means full disclosure. Not just annual financial statements, but detailed information about compensation levels, bonus structures, perks, and how those numbers compare to what an unrelated executive would earn in the same role. Think of the transparency standards that publicly traded companies are required to meet . . . and then go further.

Does the working sibling earn $400,000? Fine. Can an independent compensation consultant confirm that $400,000 is a fair market rate for the role they’re performing? If so, the non-working sibling has less room to object. If not, there’s a conversation that needs to happen.

The Dividend Question

At some point, most family businesses with non-working owners must confront the dividend question: should the company distribute cash to all shareholders, not just the employed ones?

The employed family members usually resist this. Dividends aren’t tax-deductible. Paying them increases the family’s overall tax burden. And the working members feel that the money is better reinvested in the business.

But here’s the reality: if the non-working family members have no path to receiving economic value from their ownership . . . no salary, no dividends, no realistic prospect of selling their shares . . .  then their ownership is effectively worthless. And people who hold worthless assets don’t stay quiet. They litigate.

The tax cost of paying reasonable dividends is almost always less than the cost of the family war that erupts when you don’t.

Structural Solutions

Independent compensation reviews. Have an outside consultant evaluate family member compensation every one to two years. This removes the subjectivity and gives all owners confidence that the numbers are fair.

Regular distributions to all owners. Even modest quarterly distributions signal to non-working family members that their ownership has real value.

A clear buyout path. If the working members don’t want to pay dividends and the non-working members want liquidity, create a mechanism to buy them out at fair value over time. This often resolves the tension permanently.

The families that survive this challenge are the ones who treat it as a structural problem with structural solutions . . . not a personality conflict that will resolve itself.

Is Your Business Protected?

At Garza Business & Estate Law, we work with a select group of family businesses who understand that the best time to plan and put compensation structures in place is when everyone still likes each other. We take on a limited number of engagements each year because getting these structures right takes more than templates.  It takes real expertise.  And real judgment.

If something in this article hit close to home . . . trust that instinct.

The family businesses that last are the ones that planned for the day things go wrong, while everything was still going right.

Schedule a conversation here: https://lgarzalaw.com/schedule-online/