Corporations, Families, Partnerships, and Other Horrors

By Charles Vander Kooi

Over the 20 years that I have been consulting with contractors I have seen several misunderstandings and abuses of the methods by which a company is run and organized. The most common problems have to do with the way people operate in corporations.

Family Affairs

When corporations are made up members of one family, it is a problem. Usually these family corporations ignore the concepts and benefits a corporation brings, and run their business as they would run their family. The dad or mom, or whomever started the business, runs it all and makes all the decisions. They do not appoint a Board of Directors, and hold no meetings. Stockholders never vote.

To make things worse, all the dynamics of the family and its history play out in the business. If dad has been an intimidating father, it continues to be that way in business. If brothers or sisters have felt that one or the other has received favoritism in the home, the same is seen and felt in the business.

The owner of the business may give stock to different family members at different times when the stock has a different value. One family member comes into the company when the worth of the company is down. They work hard and bring up the worth of the company through profits. Several years later, dad gives another family member an equal amount of stock with a greater value due to the hard work of the first family member.

Solving Family Problems

When I get involved in these kinds of situations I recommend the following:

• Establish the worth of the company on a regular basis. Family members should buy any stock at its current worth. The terms (loan, interest, pay increases to be able to pay for it) should be as generous as possible. This concept has several benefits:

•  First, family members will respect the ownership if they are required to pay for stock rather than having it given to them.

•  Second, if mom and dad sell the stock, the revenue flows into their future net worth (or retirement) so that what they pass on to their kids will be from that net worth, not the worth of the company. If dad gives stock only to the kids who are interested in the company, then those who aren't interested feel cheated. If the stock is passed out evenly to all the kids, then those who work the company either make or break the inheritance of the kids who are not interested or who do not work in the company. Both of these scenarios can cause great problems and family stresses over the stock of the company.

•  Third, those that buy-in pay the increased price based on the current price of the stock when they buy-in thus eliminating any concern from those who might have come in earlier.

• Appoint a Board of Directors who can advise and mediate family struggles over business decisions. Appoint an unbiased, multi-aged group of people respected by all the members of the family. This board should meet 3 to 4 times a year to help the corporation make decisions and resolve any conflicts.
• Dad or mom should do 2 things as the major stockholder or president of the company.

•  First, acknowledge the perpetuity of the company will occur only if they are willing to give up the reins.

•  Second, establish a plan with the other family members as to how and when that control will shift. My greatest admiration has been for those people who have known how to bow out of a company with grace and honor.

Stockholder Salary Conflicts

Another problem occurs when people feel that being a stockholder is what determines a person's salary. Here is what happens. Two or 3 people are the major stockholders. Often times they own equal or close to equal amounts of stock.

Because they are close to being equal owners, they feel they should each have the same salary. This really becomes a travesty of corporate justice when one has the responsibility of running the company, another runs the field, and another is a foreman on the job. That may sound like a wild example, but I have seen it.

Also, contrary to what some people think, stockowners are not entitled to a certain kind of job. They may or may not be qualified for that job, but because of their ownership, they insist on that position. I remind people in this situation of the following concepts:

• Stock ownership entitles you to a share of the profit based on your percentage of stock. It does not entitle you to a certain job at a certain salary. Just because I own stock in United Airlines does not mean I should be flying one of their jets.
• People should be paid different salaries based on the responsibility they have and the industry standard for the job they perform. This means that when there are multiple stockholders, there must be a difference in salary levels, because they cannot all be performing the same job.

Awarding Stock to Key Employees

Another problem: Let's say the owner of a company who has struggled along for years has finally hired a good person to work for them. The owner feels that in order to hire and keep this person they need to give them a part of the company. I recommend that you do the following:

• Do not give the stock away. Sell it to them based on the methods and for the reasons previously discussed.
• Go over the salaries and positions and stock ownership so there will be no misunderstanding. Address any other points you think may be misconstrued.
• Set up a waiting period between your discussing and agreeing upon the sale of stock and the actual sale and transfer of stock. I like to equate the selling of stock to the dating process.

•  First there is a period of time for social dates. That can be equated to them working for you.

•  Then there is the engagement period when a commitment is made but the relationship has an opportunity to be evaluated under the strains of that commitment. That is the waiting period of time I just recommended.

•  Then comes the marriage with the actual exchange of stock.

A Partnership is a Marriage

Yet another problem: Partnerships. Partnerships are just like marriages. The same relationship dynamics and work that a marriage requires will be required in a partnership. Before you enter into a partnership you should go through the 3 stages I just described-dating, engagement and then marriage. Also, be sure that you are ready to commit to the work that goes into a partnership.

One last bit of advice: No matter which way you sell the stock or enter partnerships, make sure you have in writing a good method to either buy back the stock or dissolve the partnership. It may be unromantic to have a prenuptial agreement, but this is business.