Family Business Structuring
Do you own a business legalistically? Or own shares in a trust? Then, you are Infact a part of a family business enterprise. Next comes, who gets to be the owner? What does ownership mean to you? What are your rights and responsibilities? If these are few questions that you can resonate to, you are a part of the very famous Family Business Dynamics. To top it all, most of such businesses do not even started with the intent of being a family enterprise!
Structuring and Governance is the principal in every enterprise. Though, it may mean a whole different scenario for a Family Business. Primarily because, given the unpredictable mix of personal dynamics, questions relating to business strategy as well as ownership criterion seldom arise. And even if they do it may lead to cascading concerns if not dealt with utmost care.
The Challenges and What YFC has to offer
Are you hesitant in establishing Roles and Responsibilities of Family and Non-Family members?
Consult YFC for all your Hiring Policies.
Family dynamics aren’t the same as business dynamics, and a combination of the two can be a disaster or a blessing— depending on how proactive and transparent you are. We could help you
It’s well documented that just 30% of all family businesses last into the second generation, and only 12% make it to the third generation. Why? It’s often the result of poor talent management.
Wondered why your empires collapsed an immature way?
We at YFC work towards establishing steps to help you run a sustainable business, but feel like a family!
At Your Finance Coach, we can address the above mentioned and many other to assist you structure your family business from holistic approach. If your business has just started and you seek assistance from a family member or your work is expanding or you are facing challenges pertaining family dynamics.
Amidst all this drama we invite you to spare a couple of minutes and write to us. Together we can bring about excellence in Business as well as harmony in the family!
Concept, Implications and Measures
Family enterprises are rarely premeditated completely in advance. Are we not adding is entities and activities without any real thought of their long term consequences? When we create, we often ignore the possibility of restructuring or destruction. Demerger is nothing but a form of business reorganisation. It can also be termed as a vertical split of an existing company into two or more companies, with same shareholders, and is subject to certain prescribed conditions under the Income tax Act. Unfortunately, restructuring a family group invariably results in unwanted tax implications. On the face of it, using a demerger to extract wealth from a family company may be more tax effective than simply selling equity in the parent entity or conducting a share buy-back.
There are usually three main scenarios and ways a demerger can be achieved tax efficiently:
Statutory or Exempt Demerger
The Statutory or Exempt Demerger was introduced into legislation as the government recognised that corporate groups should be able to restructure without adverse tax consequences. However, this form of demerger has a number of strict conditions making it unsuitable for many business scenarios especially family business enterprise.
Liquidation demergers have been widely used where a Statutory Demerger was not possible but involve the costs of liquidation.
Capital Reduction Demerger
The Capital Reduction Demerger is now increasingly popular and usually the escape route if the above mentioned ways prove ineffective. It is often the last resort. Here, with the support of a director’s statement of solvency, one can reduce the share capital which is a fairly simple procedure. Previously a company would have required the consent of a court for this procedure.
Equity demands that like other forms of business reorganisation split of family-owned businesses should ordinarily not trigger adverse tax implications and impose extra burden on family members
Unfortunately, when it comes to split of family businesses by law of section 47 of Income Tax, exempts from capital gains any complete or partial distribution of property of a Hindu Undivided Family is just about the sole manifestation of the equity philosophy in Indian tax laws.
In summary, given the uncertainties and complexities involved, implementation of a family split requires careful and extensive planning to mitigate unwanted tax costs. Without a protective mechanism under the Income tax Act, the split up often involves a series of opaque share and business transfers which are not necessarily based on an arm’s length. If you are asking these questions, let us assure you are not alone!
Demerger could be brought to affect by either of these ways:
The demerger may be partial or complete, we here at Your Finance Coach are experts in providing careful demerger relief provisions in the context of restructuring or demerging family groups. We provide intricate services like:
Although we understand that demergers are essentially undertaken either as an exercise of corporate restructuring or to give effect to kind of partitions in case of family owned enterprises. Whatever be the situation, often we forget the underlying fact that a demerger should eventually lead to smooth functioning of each segment with as much less tax and other litigations.
We can help you make this demerger a win-win for both the undertaking company as well as the resulting company.
Want to know how? Drop us a message and experience it for yourself.