THURSDAY, March 28, 2024
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Legal tools for succession of family businesses

Legal tools for succession of family businesses

WHEN YOU THINK of family businesses you may immediately think of a small scale father and son business, such as a corner grocery shop. Of course these types of businesses exist, but that’s not the whole story.

If you take a closer look at ‘large impact’ enterprises around the world and in Thailand, you’ll definitely find that some of the ultimate stakeholders are family branches, which is to say that they’re family owned businesses at the top level with a corporate structure. A study of leading firms and academic institutes shows that two-thirds of the world’s businesses belong to family firms. How did this high figure come about?
The answer to this question is simply that they’re incorporated firms. They’ve obviously built up from scratch comprehensive know-how, intensive marketing, resourceful personnel and networks. However, the real key to their success is how they’ve passed everything they’ve built from the safe hands of one generation to the next generation smoothly while remaining on top of the market, even though family conflict could be dramatic and hard to resolve when it comes to dealing with wealth ownership and management. 
In addition to this, legal mechanisms are a key contribution to family business succession. Most of the family firms are incorporated as a limited company which is a common form of business organisation under the Civil and Commercial Code. The increasing numbers of limited company registrations with the Department of Business Development from the past to the present proves that the limited company is the most selected business organisation. This is because of the many advantages which include tax benefits, funding credits, and transferable share capital.
Successful family firms share the same organised corporate documentation needed to succeed, as they’re the basic requirements to apply for bank loans and associated financing schemes with non-banks, given that the company shares can be pledged against the share certificate as loan collateral in addition to the assets. 
Based on our experiences, many of the family firms recheck and tidy up their company documents to ensure internal accuracy and as an ongoing obligation under the financial arrangement at every year end, together with producing a financial report. The common mistake we’ve found is having an undocumented share registry book and share certificate, both of which are crucial documents under the law. Well-organised company documents don’t just represent the trustworthiness of a business operation, but also act as a legal token to succession and even for the sale of the business.
For the next level of succession plan, the number of descendants and each of their sections are key factors to tailor the suitable shareholding structure in order to ensure a smooth transition and continuous operation, keeping in mind that there’s no such thing as a fixed formula, or as simple as forming a limited partnership between the descendants, as the law allows a limited partnership to hold the shares in the limited company. This is as long as the agreement between the partners has been put in place from the early stages to address the potential conflict as well as the inheritance and gift tax implications. These things can be easily arranged while the predecessor is in a position to align the successors rather than being caused by a last will, which could be challenged when he or she isn’t there anymore.
Even so, the last will is a helpful legal tool if some parts of the succession need to be kept secret until it’s time. The legal formality to create the last will can be as simple as hand-written paper by the predecessor with his or her signature affixed. Confidential as well as officially endorsed wills are permitted by law with the advantage of being a genuine proof of document. In any case, the administrator of an estate to be named on the will is also the key person to ensure the smooth distribution of the estate and the arrangement of required bureaucracy. 
To conclude, the succession plan for family firms in the form of corporations begins from the well-organised company documents to the corporate structuring and the last will, taking into consideration the aligned successors to ensure that it isn’t only the legacy that’s passed on, but also the secured ‘Business DNA’.

Author: PHI PLOENBANNAKIT, Manager, Tax and Legal, PwC Thailand 
 

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