Business Structuring & Family Harmony – Part 2

Below is the second part of my partner, Jeff Faulkner's, three part series on finding family harmony through business structuring. I’m currently working with a blended family business that has two children from each side.  Two of the four children are actively involved in the business, one from the dad’s side and one from the mom’s side. Both active kids want to be able to run the business at some point, but the entire family has strongly suggested, if not warned, against the two active kids working together. Here’s the problem, the business is made up of five different franchises underneath one corporate umbrella. That’s right; all five businesses are inside the same corporation.  And, the bulk of the family’s net worth is the operating business. What’s a family to do? Well, you could start by forcing the kids to grow up and learn to cooperate with each other, so they could work together. On the other hand, if the family is right in that there is absolutely no way to make this happen, we’d then be setting them up for failure and family disharmony. So, why not build in some flexibility? An IRS Section 355 divisive re-organization, or tax-free spin-off, of the separate businesses is in order. While this will most certainly be a costly initiative that is dependent on IRS approval, it will create the flexibility for the active kids to remain in business together if they show that they can mature beyond their sibling rivalry issues. In the event they cannot, well, we then have the flexibility to divide the businesses up and allocate one or more to one child and one or more to the other child. Further, we will also segregate the real estate that each business is sitting on into separate entities to provide additional planning flexibility, not to mention, much needed additional liability protection. While this environment is not perfect by any stretch of the imagination, it most assuredly creates an environment that is more conducive to the maintenance of family harmony in the long run. For the final part of this series, please read "Business Structuring & Family Harmony – Part 3."