A crucial question in a family business is ensuring future generations’ most effective business continuation. If the founders of a family business do not address this question in a timely manner, family assets tend to fragment with each generation, making a consensus among numerous individuals increasingly challenging. Disagreements often lead to the sale of a previously thriving business or the complete cessation of family business operations.
This not only disrupts the economic stability of the family but also strains family relationships. Therefore, it is essential to plan for generational succession well in advance. One suitable solution for generational transition is to establish a so-called family holding.
Initial Steps for Generational Transition
The phrase “the sooner, the better” also applies to business continuity through the next generation. In the early stages, it is essential to sit down with the founder of the family business to understand how the business operates and their intentions for its continuation. The most common challenges in ensuring the survival of the family business include the number of heirs (successors), where the risk of fragmenting the family business is high, as well as reaching a consensus among multiple heirs on the direction of the family business.
Another challenge is when heirs have no interest in actively participating in the family business but still want to derive financial benefits from it. This can be achieved by structuring the business so that some family members are involved in management, some are in control, and others are only in profits. It is a common practice abroad for professional managers who are not family members to take charge of running the family business.
Also, impending disputes between heirs and the associated legal fees and other costs motivate founders to avoid inheritance proceedings. Issues may also arise when partners are unmarried, as the second partner may inherit only to the extent specified in the will. Communication breakdowns can occur if the founder does not inform family members in advance about their vision for the continuity of the family business. This lack of communication may make family members feel slighted or deprived, resulting in potential legal disputes.
Subsequent discussions with the founder should involve family members affected by the family business. This allows them to express their opinions on the founder’s intentions and assess whether they can envision the business functioning after the founder’s departure. It also allows clarifying the founder’s decisions to family members.
The founder should prepare selected successors for future leadership roles in the family business. If not adequately prepared, a successor cannot replace the founder right from the start. Therefore, the founder should give their successor time and tolerate some company management mistakes.
Initiating a family holding involves consolidating assets. The founder’s assets, intended to be part of the family holding, are compiled for this purpose. Depending on the size and diversification of business activities, an appropriate holding structure is chosen, considering tax optimization. If the family business has an international dimension, the holding structure may include legal instruments from abroad. In the Czech Republic, for example, trust and foundation funds are commonly used for this purpose.
Choosing the Appropriate Legal Entity for the Holding
In Slovakia, the suitable legal forms for the parent company of a holding are a limited liability company, a joint-stock company, or a simple joint-stock company. A limited liability company has the advantage of allowing the exclusion of the transfer of business interests to another person or making it conditional on the consent of the general meeting. This eliminates the risk of third parties entering the family business. Another commonly used practical advantage is excluding business interest inheritance, preventing fragmentation. A limited liability company allows for modifying rights and obligations associated with individual business interests, providing flexibility in organizing relationships between partners, especially regarding decision-making rights and the right to a share of profits. The disadvantage is the transparency of partners in a limited liability company, as they are visible in publicly available extracts from the commercial register.
In contrast to a limited liability company, the advantage of a joint-stock company is the anonymity of shareholders. Although registered in the Central Securities Depository, this list is not publicly accessible. Similarly, it is possible to restrict the transfer of shares to other persons but not entirely exclude them. In a joint-stock company, inheriting shares cannot be excluded.
The simple joint-stock company is Slovakia’s newest legal form of capital companies, created mainly to serve the developing startup scene. It combines several advantages of a limited liability company and a joint-stock company. For instance, a simple joint-stock company allows limiting or entirely excluding the transferability of all or only some types of company shares. It also allows excluding the possibility of inheriting shares. However, unlike a classic joint-stock company, the list of shareholders in a simple joint-stock company is publicly accessible, removing shareholder anonymity. A simple joint-stock company with an extensive shareholder structure can be established with low share capital.
It is worth noting that after the creation of the parent company, it is advisable to establish internal agreements among partners or shareholders. Founders often want to link the utilization of larger financial resources by family members to specific life milestones, such as weddings, childbirth, completion of higher education, and the like.
Benefits of a Family Holding
A well-established family holding brings numerous benefits. The primary advantage is the integrity of the family business and its smooth operation over multiple generations, achieved by not dispersing decision-making rights among many individuals. Additionally, a family holding allows for a clear overview of the entire family wealth structure. All of this results in both time and economic efficiency in decision-making and management processes. When setting up a family holding, it is crucial to consider tax-efficient solutions. Finally, a family holding serves as a suitable solution for asset protection and ensures the smooth functioning of the family business during the period between the founder’s death and the conclusion of inheritance proceedings.
This article has been brought to you by Falath & Partners.
Authors of the article:
Ján Falath, Managing Partner
Vladimír Sedliak, Associate
