Intergenerational transfer of a family business

Why address succession in a timely manner

If succession is not addressed in time, unpleasant consequences may arise: the successor generation may lose interest in the family business or go their own way, key employees may leave the company due to leadership uncertainty, and in the worst-case scenario, an unprepared company may cease to exist after the founder's departure.

Experience shows the importance of timely planning – according to surveys, almost 2/3 of owners plan to hand over their business to their children, but only about 33% of family businesses actually succeed in doing so. The success rate of further transfers then decreases with each generation. The reason is precisely the absence of a succession plan and underestimation of preparation.

Often, the solution is left to the last minute, when owners realise they have no one to hand the company over to or do not know how. It is therefore advisable to start thinking about the future of the company as soon as possible – ideally while the founder is still actively managing the business and can influence a smooth transition themselves. This gives them the certainty that the fate of the company and the family assets is taken care of, even in the event of unexpected events.

Legal options for intergenerational company transfer

The Czech legal framework offers several options for transferring a family business. Each has its advantages, disadvantages, and tax specifics. These can include gifting or selling during one's lifetime, transfer through inheritance (a will or inheritance contract), the use of a trust fund, and possibly establishing a family holding. We will discuss each option in more detail below.

In all cases, these are fundamental legal steps that need to be carefully planned and executed correctly – it is therefore recommended to cooperate with a lawyer to ensure all documents and procedures are in order. 

Transfer of a share during one's lifetime: Gifting or sale

One of the most common ways to hand over a company to the next generation is to transfer the business share or stocks to descendants during the founder's lifetime. This transfer can be done gratuitously (by gifting) or for consideration (by sale) – the choice depends on the family's preferences.

From a legal perspective, the transfer takes place on the basis of a written share transfer agreement, which must meet the requirements set by law. The signatures on the agreement must be officially certified, and the transfer is then recorded in the Commercial Register. In the case of limited liability companies, it is necessary to respect the provisions of the articles of association – these may make the transfer of a share conditional on the consent of the General Meeting or the pre-emptive right of existing shareholders. 

The advantage of a transfer during one's lifetime is the possibility of a gradual generational change. The founder can initially retain part of the share (e.g., a controlling stake) and transfer the rest to the children, so they can continue to oversee the company's operations. If they prove themselves, the rest of the share can be transferred to them over time.

Practice knows cases where an owner divided their 100% share and first transferred, for example, 2x10% to two children, and only after some time, when it became clear that they could cooperate, transferred another part. Such a procedure reduces the risk of the company passing into inexperienced hands – the successors gain practice gradually.

The founder can also incorporate their requirements and values into a shareholders' agreement or a family constitution, where the family sets the rules for functioning after the generational change (e.g., decision-making principles, profit distribution, dispute resolution, etc.). This prevents ambiguities and increases the chances of harmonious cooperation in the new generation.

Tax implications: In the Czech Republic, gifting a share to children or other close relatives is tax-exempt – it is a gratuitous income that is exempt from income tax for the recipient. The sale of a share, on the other hand, is standard taxable income for the seller; however, for individuals, there is a time test for exemption. If this period is not met, any profit is taxed at the income tax rate. 

Transferring the company by inheritance (by will or inheritance contract)

The second option is to leave the transfer of the company until the founder's death, i.e., in the form of an inheritance. In such a case, the share or stocks pass to the heirs at the moment of the testator's death (unless the company's articles of association exclude the inheritance of a share). If there are multiple heirs, they become co-owners of one share until the settlement. The testator can influence who gets the company by making a will – in it, they can, for example, preferentially bequeath the business share to a specific descendant.

Another instrument is an inheritance contract, which the new Civil Code also permits (it allows for contractually binding an heir to accept the inheritance already during the testator's lifetime). However, even a will and an inheritance contract do not exclude the rights of so-called forced heirs – direct descendants are always entitled to a compulsory share (half of the statutory share for adult children), unless they have been validly disinherited, which practically means that the company cannot be completely denied to any of the children by will without them receiving at least corresponding financial compensation.

Risks and pitfalls: Leaving the solution until inheritance carries certain risks. Inheritance proceedings can take months or even years, during which company ownership and decision-making can be uncertain. By law, the heir exercises the rights of a shareholder from the moment of death, but for example, appointing a new executive director or making fundamental decisions may be stalled until the court formally confirms the heir.

If the company is inherited by multiple descendants, disputes over management may arise, which can seriously damage the company. The law also provides for situations where an heir does not want to become a shareholder: they can ask the court to terminate their participation in the company within 3 months of the end of the proceedings. The company will then pay them a settlement share.

Some companies also have a clause in their articles of association excluding the inheritance of a share to avoid unwelcome shareholders from the wider family. In such a case, the heirs are not entitled to the share and instead receive financial compensation (a settlement share) in the amount of the share's value as of the date of the testator's death. While this protects the company from unwanted owners, it can threaten its liquidity if it has to pay out a large sum.

Tax implications: Income from inheritance is currently completely exempt from income tax (the heir does not pay tax on the acquired property). Only the notary's fee for the probate proceedings is paid, which is calculated from the value of the entire estate.

Trust Fund

An increasingly popular tool for intergenerational transfers of family businesses is the trust fund. This instrument was introduced into Czech law by the Civil Code of 2014, and since then, over 2,000 trust funds have been established in our country, a significant majority of which serve family purposes.

A trust fund works similarly to a family trust: the property allocated to the fund ceases to have an owner – the fund is a collection of assets without legal personality, managed by a trustee for a specific purpose. The founder of the fund (the company owner) draws up a contract for the establishment of the fund, or can establish the fund by an act for the case of death (a will or inheritance contract with a provision for the fund).

Business shares, stocks, real estate, and other family assets can be placed in the fund. The fund is created by registration in the register of trust funds and is governed by a statute, which is a document containing the rules of management and the designation of beneficiaries. The beneficiaries are typically family members who will benefit from the fund's assets (e.g., company profits) without necessarily making direct decisions about its management.

The main advantage of a trust fund is the preservation of the company's continuity and protection against the fragmentation of ownership. Because the contributed property is no longer owned by a natural person - it is not subject to inheritance proceedings after the testator's death - the company can continue to operate undisturbed according to pre-established rules.

The fund also allows for the clarification of rules for future generations – the founder specifies in the statute how profits are to be distributed, who may act on behalf of the fund, and how changes in management will occur. This can prevent potential family disputes and ensure that only a designated group of people (e.g., only the founder's descendants) benefits from the family business in the long term.

The original owner can, to a certain extent, retain control over the company if, for example, they become one of the trustees (the fund must, however, have at least one other trustee), or if they reserve the right to appoint and dismiss trustees as needed.

A trust fund is therefore a suitable solution, for example, when it is not possible or desirable to hand over the company directly to children or to sell it. It is often used if the descendants are still too young or inexperienced, or if the family prefers joint management of family assets instead of division. It is important to carefully select the trustee – they will make most of the decisions affecting the future of the fund.

This can be a professional (e.g., a lawyer specializing in trusts) or a person close to the family whom the founder trusts. In practice, it has proven effective to appoint multiple trustees, at least one of whom is an independent expert. The trustees can then check each other and ensure compliance with the statute and the law.

Tax and administrative aspects: Although a trust fund sounds complicated, from a tax and accounting perspective, it is not dramatic. The creation of the fund and the transfer of assets into it for family purposes are usually not subject to tax (by placing assets in the fund, the founder does not achieve taxable profit, and beneficiaries generally receive payments gradually).

Income generated by the assets in the fund (e.g., profits from the company) is taxed at the fund level at the standard corporate income tax rate, and when paid out to beneficiaries, it may be taxed similarly to, for example, dividends. The advantage is that the one-off transfer of the company into the fund does not trigger a transfer tax (it is not a sale or ordinary income) and the allocated assets are not subject to inheritance tax (the inheritance title does not apply).

Founders and trustees therefore do not have to worry about excessive bureaucracy associated with running the fund. Of course, it is necessary to account for the costs of establishing the fund (for drafting the statute, the registration fee, advisors' fees) and ongoing administration costs, but these are generally seen as a reasonable price for keeping the family wealth together for future generations.

Family Holding and Family Constitution

An alternative way to arrange assets for future generations is to create a family holding and draft a so-called family constitution. A family holding means that the family businesses are transferred under one umbrella company (the holding), in which family members have shares.

The family constitution is then a document (more of a moral commitment than a legally enforceable contract) that formulates common family values, visions, rules of succession, and the involvement of family members in the business. In the Czech environment, this solution is not yet so widespread, but it is gradually gaining attention, especially among larger business families.

The advantage of a family holding is that the family retains direct control over the company and assets. Unlike a trust fund, no external trustee is involved here – all decisions remain in the hands of family members. A holding structure can allow for a clearer management of multiple different activities (e.g., when the family owns multiple companies or properties).

A family constitution then helps to prevent conflicts by pre-establishing rules: who can get involved in management and under what conditions, how the company's management is elected, how profits are handled, how to resolve potential disagreements, etc.

It can also formulate sanction mechanisms for undesirable behavior (e.g., buying out a descendant for a fundamental breach of values). Although the constitution is not legally enforceable like a law, it functions as a strong agreement within the family – everyone knows where they stand.

From a legal point of view, creating a family holding involves restructuring ownership (e.g., establishing a new joint-stock company or LLC to which the shares in the operating companies are transferred). This is again an act that should be carried out with the assistance of lawyers and tax advisors to ensure the transfers proceed without tax implications (often using the institute of company transformation or share exchange, which are tax-neutral).

Holding a family business through a holding company does not in itself solve the generational change – it is then necessary to address the transfer of the holding's shares, which is then done by one of the methods described above (gifting, sale, inheritance, trust fund). However, a holding allows the company to be transferred as a whole within a single entity, and the family can better coordinate the process. Moreover, a family constitution can strengthen the successor's sense of responsibility for a unified vision across generations.

Summary of options: Each of the above-mentioned paths – direct transfer, inheritance, trust fund, or holding – has its place in practice. It is not uncommon to combine different instruments (e.g., gifting part of the share and placing part in a fund, or establishing a family holding and placing it in a trust fund, etc.). The important thing is to choose a solution tailored to the specific family and company. 

Risks of not addressing succession and other pitfalls

"What would happen to the company in the event of my sudden absence?" Unfortunately, many entrepreneurs ask themselves this question too late, or not at all. If the transfer scenario is not thought through, an unexpected illness or death can cause a serious shock to the company's operations.

The company can be temporarily paralyzed by decision-making paralysis. Family members can get into conflict if they are not clear about their roles and claims. Family relationships are often emotional, and these conflicts can then destabilize the company much more than ordinary business problems. There is also a risk that without a unified vision, the heirs will divide the business among themselves and go their separate ways – the result can be the fragmentation of a once-prosperous whole.

Another risk is the lack of interest from descendants in taking over the company. Today's young generation often does not want to spend all their time at work like their parents. If parents postpone involving their children in the company, it may happen that the descendant develops a career outside the family business in the meantime, and taking over the company will not be attractive to them.

Owners in some industries have a problem finding a successor – young people perceive the business as too demanding or uncertain. Last-minute time pressure then leads to hasty and wrong decisions that can damage the company.

It is also worth mentioning the reputational and business risk: family businesses often benefit from the image of a family business with a strong story, which customers appreciate. If the company had to change owners in a hurry or cease to exist altogether due to a mismanaged transfer, not only the family name would be lost, but also the customer trust built over generations.

All these risks can be significantly reduced by timely preparation. Succession should not be treated as a taboo topic – on the contrary, open communication in the family and the involvement of legal experts can protect both family relationships and the company itself.

Recommendations: how to successfully transfer a company

1. Start early and plan the process like a project: Don't leave thoughts about succession until old age. It is ideal to start planning when the founder is around 50, when they still have the energy to pass on experience and at the same time the generation of potential successors has already matured.

It is advisable to spread the company transfer over several years – define milestones (e.g., involving children in management, gradual transfer of shares, handing over the executive director function, etc.) and adapt the legal steps accordingly.

2. Involve the family and communicate: Succession concerns the whole family, so open the topic with them in time. Find out which of the descendants is interested in the company and what their ideas are. If multiple children want to run the company together, discuss how they will divide their roles.

On the other hand, if a descendant is not interested in participating, it is better to know this in advance and look for another solution (e.g., ensuring them a share of the profits or financial compensation, but entrusting the management to a sibling(s) or a professional).

The need for open communication and listening is emphasized – surprisingly many problems are caused by not talking about succession and just assuming that the children will "take over the reins". Regular family meetings about the future can prevent misunderstandings and strengthen trust.

3. Prepare the successor (not just in terms of ownership, but also management): A successful transfer is not just about signing contracts, but mainly about transferring know-how, contacts, and responsibility. Involve your children in the company's operations as soon as possible, gradually delegate project management to them, introduce them to key clients and partners.

Also allow them to gain experience outside the family business (internships, work elsewhere) – they often bring a new perspective to the company. The successor should be respected by the employees, so it is good if the founder introduces them in the role of a future leader in advance. Consider setting up a family council or a supervisory body, which will also include representatives of the older generation or external mentors.

4. Use experts – lawyers and tax advisors: The legal aspects of a company transfer are complex, and any mistake (an invalid contract, omission of an authority's consent, a poorly handled option, etc.) can have fatal consequences. The basic recommendation is therefore always to seek the advice of an experienced lawyer before the transfer itself.

A lawyer will help choose the optimal procedure (e.g., whether to gift or rather establish a trust fund), prepare high-quality contracts, and ensure compliance with legal conditions. Likewise, a consultation with a tax advisor will reveal potential tax implications and savings opportunities – especially for larger companies, it pays to structure the transfer in such a way as to avoid unexpected taxation.

Experts can also help with drafting a family constitution or setting up mechanisms that protect the family business (e.g., pre-emptive rights between siblings, a ban on transferring a share outside the family for a certain period, etc.).

5. Be clear about your goals and be prepared to compromise: Clarify what you want to achieve with succession – is your priority to preserve the family heritage at all costs, financial security in old age, or simply the long-term prosperity of the company (even under external management)?

Choose your strategy accordingly. Sometimes the best solution may be to sell the company outside the family – typically when the descendants are not interested and no trustee can replace a passionate owner. Even such a step is better to take in a planned manner than a forced one. But if the goal is to continue the family tradition, be prepared to make compromises.

You may have to back down from your ideas and trust your children, even if you might have acted differently yourself. Conversely, successors should respect the founder's legacy and realize that taking over a family business is both a privilege and a commitment.

Conclusion: secure the future of your company today 

The intergenerational transfer of a family business is undoubtedly one of the most important steps in the life cycle of a business. At the same time, it is a step that cannot be rushed or postponed – it requires careful preparation on a legal, financial, and human level. The good news is that Czech law offers a number of tools to implement succession according to the family's needs.

Whether you choose to gift a share, write a will, establish a trust fund, or another option, always remember that this process needs to be carried out "as perfectly as possible" – ideally with the help of specialists.

Don't wait until circumstances force you to act under pressure. Start planning your succession now. Talk to your family, clarify your priorities, and don't hesitate to contact an experienced lawyer or tax advisor. Professional assistance will help you avoid mistakes and find a solution that will ensure the prosperity of the company even after your departure.

By addressing succession in a timely manner, you will protect your life's work and give your children (or other successors) the chance to build on your successes. A family business, handed over with consideration and love, can continue to grow and flourish – and that is the best reward for all the years of effort.

Think today about what your company will look like in 5, 10, or 20 years. Do you have a plan for who will lead it? If not, arrange a consultation. We will help you set up a succession strategy so that the company remains in good hands and the family in harmony.

The sooner you start, the more peace of mind and certainty you will gain for the future – for yourself, your family, and your employees. Your company deserves it.