This paper provides a theoretical framework to explain the existence and prevalence of pyramidal ownership structures in family business groups. The authors argue that pyramidal structures are attractive to families because they allow access to the retained earnings of the original firm and share the non-diverted payoff of the new firm with minority shareholders, even when external funds are more expensive than internal funds. This model differentiates pyramids from dual-class shares and explains why pyramidal firms are associated with small deviations between ownership and control. The authors also analyze the creation of business groups and find that they are likely to adopt pyramidal ownership structures. The model's predictions are consistent with empirical evidence on the characteristics of pyramidal business groups, including lower ultimate ownership concentration and higher diversion in firms controlled through pyramids. The paper concludes by discussing extensions of the model and its implications for the ex-ante optimality of pyramidal structures and the relationship between pyramidal organizational form and diversion.This paper provides a theoretical framework to explain the existence and prevalence of pyramidal ownership structures in family business groups. The authors argue that pyramidal structures are attractive to families because they allow access to the retained earnings of the original firm and share the non-diverted payoff of the new firm with minority shareholders, even when external funds are more expensive than internal funds. This model differentiates pyramids from dual-class shares and explains why pyramidal firms are associated with small deviations between ownership and control. The authors also analyze the creation of business groups and find that they are likely to adopt pyramidal ownership structures. The model's predictions are consistent with empirical evidence on the characteristics of pyramidal business groups, including lower ultimate ownership concentration and higher diversion in firms controlled through pyramids. The paper concludes by discussing extensions of the model and its implications for the ex-ante optimality of pyramidal structures and the relationship between pyramidal organizational form and diversion.