Abogados y Economistas

26·07·2018

Distribution of dividends in the family business

- Bosco de Gispert Segura

One issue that usually raises controversies within the family business is the policy of dividends and compensation of administrators. It is usual for some members of the family to hold executive positions and receive remuneration, either via salary or as administrators, depending on the case. The problem arouses when not all family members are workers or administrators at the same time and there are certain family members who do not receive any income based on a compensation for work.

In these situations, the dividend policy of the company is of fundamental importance, since it will depend on the non-employee members to receive some return from the family business through the distribution of profits.

Divergences tend to arise among family workers, who in many cases prefer to reinvest the profit for the growth of the company, with non-working relatives, more prone to the distribution of the benefit, since it is their only way of monetizing their participation in the company. This second vision can be considered "short-term", since the liquidation of the benefit to the reinvestment is preceded, but sometimes it mitigates unfair situations for the sake of the working partners.

According to the Spanish Family Business Institute, 60% of family businesses take reinvestment over distribution, as it is very common to have a greater commitment to the company than in non-family companies and greater involvement of partners or shareholders. However, as new generations enter and the company grows, the tension between reinvestment and distribution may increase.

The Capital Companies Law has aimed at setting a dividend distribution of at least one third of the operating profit, but this legal provision does not solve the underlying problem either and may even be the source of greater conflicts, since it allows the separation of partners if the distributions do not meet those minimums and requires a distribution that can harm, in some cases, business interests.

To all this, the fiscal issue is added, since the distribution of benefits obviously obliges the partners to pay taxes and there is a tendency to accumulate reserves that, in many cases, are managed inefficiently and with more patrimonial criteria than business criteria. It is quite common that within the family business investments are made not directly related to the business but of a more patrimonial nature, especially, real estate investments that on other occasions and more accurately are conveyed through a subsidiary or sister of the company that manages the activity.

It is fundamental, as we see, to set a remuneration policy for family members who work in the company and to set a dividend policy for the company, in order to avoid tensions that may put the company's continuity at risk and even lead to situations of blocking between partners or administrators wholly undesirable. Regarding dividend policies, they must be able to combine the interests of the company and their possible need to make investments or strengthen themselves financially through reserves with the legitimate interests of the partners to receive a return for their membership.

It is necessary to try, either through partner's agreements or family protocols, which are the most common instruments, to establish a dividend policy that avoids conflicts and is capable of satisfying the partners without neglecting the needs of the company. Obviously, these policies should be revised and renewed because they are not the same at the initial moment of the company in which all partners are likely to work and there is only one generation that owns the business, then those of a fourth or fifth generation company.

It is highly advisable to have a consensus on these policies and put them into paper, as this is one of the issues that greater conflict generates. Minimum parameters must be set and an open part may be left to discuss annually, and it is also desirable to set the bases and times for the modification and revision of such agreements.

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