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

Technical feasibility

Ownership and Governance

Are you struggling with Ownership and Governance questions alone?

  • Want to pass on the business ownership to next generation yet afraid to loose control at strategic level?
  • More than one successor, who gets be the next leader?
  • Paying some a little too much while others are underpaid?

Find Lucrative Solutions made easy by Your Finance Coach!

We can employ family governance rules to ensure there is lesser conflict. Just to mention a few:

  • Set policies for family actions, and decisions
  • Address compensation rules
  • Articulating common and agreed upon vision and mission
  • Establishing a framework to promote learning together, sharing decisions, and communicating
  • Determining family ownership policies
  • Resolving conflicts
  • Fostering family education and information

Financial or economic feasibility

Apprehension Recruiting

Are you hesitant in establishing Roles and Responsibilities of Family and Non-Family members?

  • Family member not performing as expected. How to clearly demarcate family ties and business relationships not to impact business performance and agendas?
  • In need of a senior management role in the business, how do you choose outside the family?
  • How do you ensure fair treatment to the family members who are not employed in the business?

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

  • Identify Your Business Philosophy; is it family first, Business first or Family Business Enterprise
  • Predefine Employment policies, we can help you develop a ‘family employment policy’ that specifies the criteria and the process of joining the family business addressing the process of applying for family employment, mentoring, training and assessment.
  • Determine Power Limits for all operating philosophies, and ensure that family as well as non-family members know their power as well as the fact that they are valued team members.

Legal feasibility

Untimely Demise: Poor Succession Planning

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?

  • Loosing revenues while transitioning from one generation to another?
  • Sibling rivalry leading to unattended tasks and poor revenue generation?

We at YFC work towards establishing steps to help you run a sustainable business, but feel like a family!

  • Create a Mission Statement to identify the family’s vision for the future, documenting its dreams, hopes and ideals.
  • Choose the Right Successor, many family business owners are not comfortable allowing a non-family member to assume the CEO role
  • Clarify Roles and Responsibilities; demarcating ownership from management is a must.
  • Put down a Strong Foundation includes implementing the best business practices cited above and ensuring you’re guided by principles and values that best define your 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:

01

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.

02

Liquidation Demerger

Liquidation demergers have been widely used where a Statutory Demerger was not possible but involve the costs of liquidation.

03

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

Technical feasibility

The Staunch Implications remain

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.

  • Do you share ownership of a holding company or a group structure, and want to split?
  • Statutory demerger ruled out on basis of non trading business?
  • Want to take the reconstruction under Insolvency Act but scared of the disruptive and expensive formalities of liquidating assets?
  • Do you attempt to achieve a tax neutral demerger at the investment or holding company level?
  • Bogged down by the complex court procedure, coupled with numerous compliance requirements and potential stamp duty costs involved with demerger?
  • Suffering value decretive results and require heavy consensus from the External shareholders involved?
  • Does your mode of restructuring involve several share transfers, probably on barter basis, to achieve the desired results?
  • Vertical split is not feasible given the complexities of the shareholding pattern across a chain of investment companies?
  • Want to divide stake along with demarcation of management control but too much litigation involved?

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!

Financial or economic feasibility

Our Reliable Measures

Demerger could be brought to affect by either of these ways:

  • Demerger by agreement between promoters
  • Demerger under the scheme of arrangement with approval by court
  • Demerger under voluntary wining up and the power of liquidator

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:

  • Demerger Division 125: gain direct ownership in an entity owned indirectly.
  • Establishing, A demerger group comprising the head entity of a group of companies or trusts and at least one demerger subsidiary. A company or trust is the head entity of a demerger group if no other member of the group has ownership interests in the company or trust
  • Differentiate between Roll-over or No Rollover in favour of owners interest
  • Establish and list down Consequences and measures of roll-over well in advance
  • Consider Excluded capital gains and losses that are made by members of demerger group for disregard
  • Plan Demerger dividends
  • Tax consequences, planning of Capital Gains Tax

Legal feasibility

Conclusion

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.