Shareholder liquidity is a hot topic in family businesses. It directly impacts family members’ financial needs, relationships, and the future of the business. Balancing liquidity needs among family members can feel like traversing a minefield—especially when ownership stakes or contributions to the business come into conflict. To circumvent potentially charged debates, you need to know where dividends come from. Luckily, dividends can only come from five places.
Earnings from the operations of the family business are the classic dividend source. But they’re far from the only option.
When deciding where hard-earned income goes, profitable family businesses face big decisions. Some earnings get stuck in working capital, so they’re not free to spend. If your business needs new equipment, earnings often fund these big moves. Or, a business with loans might use earnings for repayments. Whatever is left after all that can be used for dividends.
Paying dividends from earnings is sustainable. But it requires a balancing act. If shareholder payouts crowd out investments in the business, it could spell trouble for long-term success.
For a breakdown of the four other sources of dividends, read “Where Do Dividends Come From?”
Read about a breakdown of the five sources of dividends here.
Become a Member for Your Expertly Curated Advice
Joining the Family Wealth Library means access to the information the legacy builders need to navigate family dynamics and protect our wealth. We can keep what is ours by managing familial challenges and building trust and transparency.