When one child works in the family company and the others do not, a plan can divide the value evenly and still leave the votes with the person who shows up every morning.
Equal ownership and equal control are separate decisions. A family plan can make the first without the second.
A common family business estate has one child who works in the company and one or more who have built careers elsewhere. The parents want every child treated the same. If the trust simply divides the shares equally, the child who runs the company becomes a minority owner of it, and siblings who have never worked there hold the votes that elect the board, approve a sale and decide who gets paid what.
The opposite plan, leaving all the shares to the operating child, keeps control in the right hands. It usually leaves too little in the rest of the estate to balance it, because for many families the business is the largest thing they own.
Two classes of shares. A California corporation may issue classes of shares with full, limited or no voting rights (Corporations Code section 400). A common structure is a small block of voting shares and a large block of nonvoting shares, identical in every other respect. The trust leaves the voting shares to the child who runs the company and divides the nonvoting shares so that each child's total share of value matches the plan.
S corporations. An S corporation may have only one class of stock, but differences in voting rights alone do not create a second class (Internal Revenue Code section 1361(c)(4)). Every share must still carry identical rights to distributions and liquidation proceeds.
What that rule means for the operator. Because distributions follow share count, the active child cannot be rewarded with extra distributions. The reward for running the company is salary, set by a board that child now controls, and salary is exactly where siblings tend to object. A shareholders' agreement that fixes a compensation method, such as an industry benchmark or a periodic outside review, settles the question while the parents are still there to settle it.
Nonvoting is not voiceless. Holders still vote as a class on amendments that would adversely change their shares, whether or not the articles give them a vote (section 903). Any shareholder may demand to inspect the accounting books, records and minutes for a purpose reasonably related to their interests as a shareholder (section 1601). Plan for siblings who read the books.
LLCs. The operating agreement does the same work. In a manager-managed LLC, managers decide matters in the ordinary course (section 17704.07). Name the active child as manager and set the economic percentages separately.
Appraisers commonly value a nonvoting or minority interest in a closely held company below its proportionate slice of the whole, applying discounts for lack of control and lack of marketability. Under Revenue Ruling 93-12, the IRS will not combine family members' holdings to deny a minority discount on gifts of stock simply because the owners are related.
That cuts two ways. Giving nonvoting shares during life can move value to the children at a lower gift tax value. At the same time, an inheritance divided by share count may not be equal by value, because the voting block can be worth more per share than the rest. The trust should state whether equality is measured by share count or by appraised value, and as of what date.
Finally, give the nonvoting holders a way to turn shares into money. Minority shares in a private company have almost no outside buyer. A buyout right in the shareholders' agreement, with a pricing formula and a payment schedule the company can carry, lets a sibling exit without forcing a sale of the business.
Estate Planning for a Family Business treats the trust, the articles and the shareholders' agreement as one plan. The trust decides who receives the value. The share structure decides who runs what that value is made of.
General information about California and federal law, not legal advice, and no attorney-client relationship is created. Whether a recapitalization suits your company depends on your entity, its tax election, its governing documents and the terms of your trust.
Bring the trust, the articles and bylaws or operating agreement, and any recent valuation. We will map who would own the value and who would hold the votes.
