In a recent Forbes article, contributor Steve Parrish wrote about an interesting issue that most closely-held businesses, often family-owned, face in some way or another: how to maintain control over a business. The problem is not a small one, because failure to properly plan can create a situation where ownership of the business falls into the hands of individuals who aren't right for the job.

Parrish mentions that some of the ownership planning should take place during the process of incorporating the business. One thing business owners are able to do is to provide non-voting stock to those who they do not ultimately want to gain control of the company. Non-voting stockholders do not have the ability to vote in matters of business governance. 

Another possibility is to be aware of and, if required, take positive steps to avail the company of certain protections under state law. In some states, there are laws pertaining to closely-held companies which can help in the task of securing ownership. Certain states require a company to incorporate these laws into its documents in order for them to apply, so it is important for closely-held businesses to be aware of the law in their state and to work with an attorney in taking advantage of those protections.

Parrish emphasizes that closely-held business owners who really want to restrict ownership should try to make use of other incentives than stock, such as sales or profit incentives, phamtom stock and stock appreciation rights. In many cases, these alternative arrangements are better targeted to encourage the kind of behavior ownership wants to encourage anyway.

Regardless of the specific circumstances a closely-held business finds itself it, there is a solution for the problem and it can certainly pay to work with an experienced attorney when working through the legal ramifications of any plan.

Source: Forbes, “Control Freaks Take Heart: How To Maintain Control Of Your Business,” Steve Parrish, Dec. 22, 2014.