The Anatomy of Layered Ownership
Ownership of a family business is rarely as simple in the second and succeeding generations as it is in the first. The entrepreneur may have had all decision-making authority and 100% of the ownership shares, whereas by the second or third generation, ownership may be divided among a surprisingly large number of family members and even non-family parties. It makes sense, then, that ownership is not as simple as dividing all authority and benefits among all successive owners. Instead, as Gregory Monday points out in his article, “Business Succession Planning with the Four Levels of Ownership and Control,” family business ownership can be divided among the next generation in a variety of ways and at a variety of levels.
Beneficial Interests: the right to dividends or other financial returns from the business, including salary and other forms of compensation. This right can be extended to include shareholders as well as employees and debt holders.
Voting Control: the right to vote in certain, limited matters such as the election of directors, modifications to governance practices and other matters that substantially affect the business. Persons with voting control do not make day-to-day business decisions and can even be limited in the kinds of matters on which they are allowed to vote. The business should have relatively balanced proportions of voting control to equity in order to ensure that a tiny minority of shareholders does not inequitably control the vast majority of voting rights.
Board Authority: the right to make decisions as a group, rather than individually, in appointing officers and to oversee the management of the business. Directors are accountable to the shareholders and, as such, determine overall strategy and make decisions regarding officer compensation and payment of dividends. Boards can delegate some authority to special committees that include non-voting advisors.
Management Authority: the right to make decisions pertaining to the running of the business and to enter into contracts and make transactions within the ordinary scope of the business. Oftentimes management also owns a large share in the business, and this practice helps managers act more responsibly and with greater attention toward long-term strategic planning.
Each of these levels of control can be separate from the other, meaning an individual with voting rights may not have any other role in the business. On the other hand, ownership can be, and often is, structured so that an individual is involved in more than one level of ownership, such as beneficial interests and management authority. Having multiple levels of accountability and authority helps ensure the family business has checks and balances in place for responsible governance.
Contributing Sources: http://www.wealthstrategiesjournal.com/articles/business-succession/2010/09/; http://beginnersinvest.about.com/od/investstrategiesstyles/a/aa042306a.htm