Do you know about various ways of Succession Planning for Family-Owned Business?

Positive Facts to know about

• India as a country is the 3rd largest in the number of family businesses.
• 75% of publicly traded companies & 85% of private entities are family-owned.
• 79% of India’s GDP is contributed by family-owned businesses which is the highest globally.
• 60% of the Indian households are employed by the family-owned businesses.

Hard Truth to know about

• 45% of the family businesses have no formal channels of business communication.
• Only 11% of families have a conflict resolution mechanism in place.
• Merely 10% of the family businesses make it to the 3rd generation.

Succession modes for Family-Owned Business

1. Will – It is the most powerful document as it has all the power to supersede the Succession Laws prevalent for the time being in force. In the absence of the Will, it is the applicable Succession Law that will prevail. If any immovable property is passed through a will, then probate is mandatory provided that the immovable property is in Mumbai (Bombay), Chennai (Madras) & Kolkata (Calcutta). Nominations cannot over-rule a Will, so it is advised to have a nomination in line with a Will.
2. Family Trust – It has a Settlor, Trustees & Beneficiaries. The trustees can be any Professionals. Trust can be revocable or irrevocable however advised to have irrevocable trust due to taxation benefits. Trust is a pass-through entity for taxation purposes. The trust can be a discretionary trust (where the share of the beneficiaries is not known) or a specific trust (where the share of the beneficiaries is known). Discretionary Family Trust brings flexibility to vary the distribution based on the desires of the Founder/Promoter. The trust is governed by the provisions of the Indian Trust Act, of 1882.
3. Hindu Undivided Family (HUF) – Since December 2005, daughters are considered as Coparceners in the Father’s HUF is a very positive amendment that is not known to many so the Daughter can become Karta of the Father’s HUF provided the Father has no Son to become the Karta after his demise. Females cannot form HUF.
4. Family Settlement Agreement (FSA) – It must be a family asset that is passed on through the generations. FSA is completely tax-free.

For any queries & clarifications please feel free to reach out on + 91 – 9819880244 or info@bsga.in

About the Author

CA Bhavin S Gala, a Practicing Chartered Accountant based out in the financial capital of India, Mumbai has a decade of work experience with SMEs in the areas of Succession Planning, Family Governance, Corporate Law, Strategic Advisor to the Promoters and value Management Consultancy Services.

Disclaimer

The views expressed herein are solely those of mine and not of my Firm nor those of the ICAI or any of its committees. The ICAI and my Firm do not accept any responsibility for omission or inadequacy of the contents in this document and for loss caused to any person who acts or refrains from acting in reliance on the contents of this document irrespective of the cause of / reason for the loss.