Dividends are intended to provide a return to shareholders of the family business. Paying dividends may not necessarily be financially motivated because the internal rate of return on funds reinvested in the business may make the capital allocation of paying dividends fiscally inefficient. This means that the business could reinvest these funds at a better rate of return than the dividend recipients could invest those same funds.

However paying dividends can create less potential or existing strife between those who are owners and those family who work in the business for a salary. Dividends provide some cash flow to all owners which can then make the employment fair compensation matter less of an issue. Consistency of the dividends is important.

Beware the entitlement trap. This can happen when the dividends reach a level where the recipients lose their personal work initiative. This number can be different for all families but I would think business owners all wish to avoid their children from catching “affluenza”. Generally when first introducing dividend payments to the family, be conservative in the quantum of the dividend.

As the family business becomes more widely held, making the dividend policy more formal is important. This policy can set out expectations and can provide clarity to the owners of the family business. Make sure you communicate the dividend policy to all stakeholders.

Learn, think, apply!