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Economic remuneration of partners in the family business

Business Law
Economic remuneration of partners in the family business

The remuneration of the partners in the family business is one of the most important and delicate aspects to regulate, both economically and legally. In fact, this is one of the key points of any capital company. But in the case of family businesses, some additional factors come into play.

First of all, the fact that the family business is often not only the main source of income but also the partner's life project. Especially in the case of first-generation companies. 

Second, the regime of transfer of control of the company. Given that we are dealing with closed companies, the shares or participations will be transmitted fundamentally as a legacy and may fall into the hands of people interested either in the management of the company or in the mere obtaining of income from work or capital.

Third, the factual reality that placing family members in the company is a disguised form of dividend distribution, which can lead to uneconomical and even illegal strategies. 

Therefore, it is convenient to pay attention to these factors, which go beyond the traditional problems related to the distribution or not of benefits, the labor regime of the partners and administrators and the eventual separation or challenge of agreements by the discordant partner.

Economic rights associated with the participations or shares

As the lawyers specializing in corporate law comment, the main remuneration right of the partner of any company is the one associated with their participation in the capital stock. This will give you a right to collection proportional to your control volume, which will be effective both in the distribution of dividends and in the case of liquidation of the company.

Tendentially, the economic rights associated with any participation or share are identical to those of any other analogous title. But in practice, privileged titles tend to be established, especially in the case of family businesses.

This usually leads to the existence of shares or participations emptied of political content, but with greater economic rights. Such titles are useful incentives for investors, managers and key employees, as they help align their objectives with those of the organization without losing control of the organization.

For more information, we recommend reading our article on phantom shares and stock options as alternative incentive methods.

Finally, it should be noted that the regime of economic rights associated with the share or participation may also be affected by the constitution of real rights over such titles. For example, the establishment of pledge or usufructuary rights dissociates economic and political rights between the owner of the right and the full owner. We influence this because it is common to resort to these figures in family businesses as a method of controlling decision-making (for example, as a reinforcement of a vote syndication pact).

In summary, the remuneration of the partners in the family business, in its most basic sense, will depend on the economic content of the shares or participations they hold.

Remuneration of the partners in the family business when there is provision of services 

As with any other company, the partner may have remuneration rights associated not only with the ownership of shares or participations but also with the provision of services. That is, it can simultaneously receive income from work and capital. In this sense, it will be convenient that the Statutes and the family protocol detail under what conditions the family business can receive services from the partners and their relatives.

This is particularly important, because family businesses tend to be managed under the principles of equality, solidarity and support rather than under business criteria. Therefore, it is not uncommon for ad hoc jobs to be created to provide financial support for family members.

Apart from the damage that this entails for the professionalism of the organization and the disincentive effect on the rest of the workforce, social instruments should regulate these situations. In part, because they can provoke distrust and quarrels between family members. And in part, because it can mean not only the decapitalization of the company but also a form of disguised dividend distribution.

Especially serious is the assignment of positions "by finger" when it affects the administrators of the company. In this aspect we must remember:

1.- That it is a common practice, used by control groups to retain the management of the organization.

2.- That does not have to be legal for this reason. It may involve a conflict of interest, in addition to breaking the remuneration criteria established for administrators by the Capital Companies Act. Both issues that would allow to challenge the appointment and even demand the responsibility of the administrator. The same applies when it is the partner himself who acts as administrator (even being a de facto administrator).

Regulation of the economic rights of the partner in the family business

Therefore, it is essential to regulate the economic rights of the partner in the family protocol and in the Bylaws. Such regulation may complement that established in the applicable legislation, which includes provisions such as: 

1.- The possibility of separation of the partner before the repeated withholding of dividends by the company. 

2.- The possibility of challenging agreements and, where appropriate, requiring the responsibility of administrators when the creation or allocation of jobs violates the law or the Statutes or harms the company for the benefit of certain partners or third parties.

3.- The differentiation of legal regimes applicable to those who provide services to the company (commercial for self-employed workers and labor for employed workers) and even of special systems within them (as in the case of the special relationship senior management). 

Given the large number of factors that come into play in these situations, we recommend consulting with Business Lawyers when making decisions regarding the remuneration of partners in the family business. The advice of a specialist can maximize legal certainty when determining these remuneration regimes and the precautions to adopt.

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