Intergenerational handover of the family business Legal options, risks and recommendations

Handing over a company built up over a lifetime is a sensitive issue for owners, both personally and for their families and businesses. In the Czech Republic, up to 70% of small and medium-sized enterprises are family-owned, but only about one in three manages to successfully pass the baton to the next generation. A common reason for failure is the lack of a timely succession plan—founders postpone decisions until they ultimately have no one to whom or how to transfer the business. This can lead to family disputes or even the collapse of the business. This article describes the legal options for intergenerational transfer, possible solutions, and the risks associated with postponing succession.

Do you need advice on this topic? Contact the ARROWS law firm by email office@arws.cz or phone +420 245 007 740. Your question will be answered by "JUDr. Jakub Dohnal, Ph.D.,LL.M.", an expert on the subject.

Why address succession in a timely manner

Transferring a family business to successors is not only a technical and legal act, but also an emotionally demanding process—the company is often the "family silver" for its founder, and the idea of relinquishing control raises concerns. Many owners naturally wonder whether their descendants are capable of running the company, whether they even want to, and how to prevent disputes between their children. These questions are entirely justified.

If succession is not addressed in a timely manner, there may be unpleasant consequences: the next generation may lose interest in the family business or go their own way, key employees may leave the company due to management uncertainty, and in the worst case, an unprepared company may cease to exist after the founder's departure.

Experience shows the importance of timely planning—according to surveys, almost two-thirds of owners plan to pass their business on to their children, but only about 33% of family businesses actually succeed in doing so. The success rate of succession then declines with each generation. The reason is precisely the absence of a succession plan and the underestimation of preparation.

Often, the solution is left to the last minute, when owners realize that they have no one to hand over the company to or do not know how to do so. That is why it is 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. This will give them the certainty that the fate of the company and family assets is taken care of, even if unexpected events occur.

Legal options for intergenerational transfer of a company

Czech law offers several options for transferring a family business. Each has its advantages, disadvantages, and tax specifics. These include donation or sale during the founder's lifetime, transfer through inheritance (will or inheritance contract), use of a trust fund, and possibly the establishment of a family holding company. Below, we will take a closer look at each of these options.

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

Transfer of shares during lifetime: donation or sale

One of the most common ways to transfer a company to the next generation is to transfer business shares or stocks to descendants during the founder's lifetime. This transfer can be done free of charge (by donation) or for a fee (by sale) – the choice depends on the family's preferences.

From a legal point of view, the transfer takes place on the basis of a written share transfer agreement, which must meet the requirements set out by law. The signatures on the agreement must be officially certified, and the transfer is then entered in the commercial register. In the case of limited liability companies, the provisions of the articles of association must be respected – these may make the transfer of shares subject to the approval of the general meeting or the preemptive rights of existing shareholders.

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

There are cases in practice where the owner divided his 100% share and first transferred, for example, 2×10% to two children and only after some time, when it became clear that they were able to work together, did he transfer the rest. This approach reduces the risk of the company falling into inexperienced hands – the successors gain experience gradually.

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

Tax implications: Donating shares to children or other close relatives is tax-exempt in the Czech Republic – it is considered gratuitous income, which is exempt from income tax for the recipient. On the other hand, the sale of a share is standard taxable income for the seller; however, there is a time test for exemption for natural persons. If this deadline is not met, any profit will be taxed at the income tax rate.

Transfer of the company by inheritance (will or inheritance contract)

The second option is to leave the transfer of the company until the death of the founder, i.e., in the form of inheritance. In this case, the share or stock passes to the heir upon the death of the testator (unless the company's articles of association exclude the inheritance of shares). If there are multiple heirs, they become co-owners of a single share until settlement. The testator can influence who acquires the company by drawing up a will – in it, for example, they can bequeath the business share to a specific descendant.

Another tool is an inheritance contract, which is also permitted by the new Civil Code (it allows the heirs to be contractually obliged to accept the inheritance during the testator's lifetime). However, even a will and an inheritance contract do not exclude the rights of so-called compulsory heirs – direct descendants are always entitled to a compulsory share (half of the legal share for adult children), unless they have been validly disinherited, which in practice means that it is not possible to completely deny a child the company by will without providing at least adequate financial compensation.

Risks and pitfalls: Leaving the solution to inheritance carries certain risks. Probate proceedings can take months or even years, during which time the ownership and decision-making of the company may be uncertain. Although by law the heir exercises the rights of a partner from the moment of death, the appointment of a new managing director or fundamental decisions, for example, may be delayed until the court formally confirms the heir.

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

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

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

Trust fund

Trust funds are an increasingly popular tool for intergenerational transfers of family businesses. This institution was introduced into Czech law by the Civil Code of 2014, and since then, more than 2,000 trust funds have been established in the Czech Republic, the vast majority of which are used for family purposes.

A trust fund works similarly to a family trust: the assets allocated to the fund cease 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 owner of the company) draws up a contract establishing the fund, or may establish the fund by means of a disposition of property upon 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 established by registration in the register of trust funds and is governed by a statute, which is a document containing the rules for management and designation of beneficiaries. Beneficiaries are typically family members who will benefit from the fund's assets (e.g., company profits) without necessarily having a direct say in its management.

The main advantage of a trust fund is that it maintains the continuity of the company and protects against fragmentation of ownership. Since the assets invested are no longer owned by a natural person—they are not subject to inheritance proceedings after the death of the settlor—the company can continue to operate undisturbed according to predetermined rules.

The fund also makes it possible to clarify the rules for future generations—the founder specifies in the statutes how profits are to be distributed, who is authorized to act on behalf of the fund, and how changes in management will take place. This can prevent potential family disputes and ensure that only a specific group of people (e.g., only the founder's descendants) benefit from the family business in the long term.

The original owner can continue to retain control over the company to a certain extent if, for example, he or she becomes one of the trustees (however, the fund must have at least one other trustee), or reserves the right to appoint and dismiss trustees as necessary.

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

This may 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 useful to appoint multiple trustees, at least one of whom is an independent expert. The trustees can then monitor each other, ensuring compliance with the statutes and the law.

Tax and administrative aspects: Although a trust fund sounds complicated, from a tax and accounting point of view, it is nothing dramatic. The creation of a fund and the transfer of assets to it for family purposes is usually not subject to tax (by placing assets in the fund, the founder does not achieve taxable profit, and the beneficiaries usually 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 to the beneficiaries, may be taxed similarly to dividends, for example. The advantage is that a one-time transfer of a company to the fund does not trigger transfer tax (it is not a sale or ordinary income) and the separated assets are not subject to inheritance tax (the inheritance title does not apply).

Founders and administrators therefore do not have to worry about excessive bureaucracy associated with the operation of the fund. Of course, it is necessary to take into account the costs of setting up the fund (for drafting the statutes, registration fees, advisors' fees) and ongoing management costs, but these are generally considered a reasonable price to pay for keeping family wealth together for future generations.

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Family holding company and family constitution

An alternative way to organize assets for future generations is to create a family holding company and draft a family constitution. A family holding company means that family businesses are transferred to a single umbrella company (holding company) in which family members hold shares.

A family constitution is a document (more of a moral commitment than a legally enforceable contract) that formulates shared family values, visions, rules of succession, and the involvement of family members in the business. This solution is not yet widespread in the Czech Republic, but it is gradually gaining attention, especially among larger entrepreneurial families.

The advantage of a family holding company is that the family retains direct control over the company and its assets. Unlike a trust fund, there is no external administrator involved—all decisions remain in the hands of family members. A holding structure can enable more transparent management of multiple activities (e.g., when a family owns multiple companies or real estate).

A family constitution then helps prevent conflicts by setting rules in advance: who can participate in management and under what conditions, how the company's management is elected, how profits are handled, how to resolve any disagreements, etc.

It can also formulate mechanisms for sanctions for undesirable behavior (e.g., paying out a descendant for a fundamental violation 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, the creation of a family holding company involves the restructuring of ownership (e.g., the establishment of a new joint-stock company or limited liability company to which shares in operating companies are transferred). This is again a task that should be carried out with the assistance of lawyers and tax advisors to ensure that the transfers take place without tax implications (company transformations or share exchanges, which are tax-neutral, are often used).

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

Summary of options: Each of the above methods – direct transfer, inheritance, trust fund, or holding company – has its place in practice. It is not unusual to combine different tools (e.g., donating part of the share and putting part of it into a fund, or establishing a family holding company and putting it into a trust, etc.). It is important 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, if at all. If the handover scenario is not well thought out, unexpected illness or death can cause serious disruption to the running of the company.

The company may be temporarily paralyzed by decision-making paralysis. Family members may come into conflict if they are unclear about their roles and entitlements. Family relationships tend to be emotional, and these conflicts can destabilize the company much more than normal 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, resulting in the fragmentation of what was once a prosperous entity.

Another risk is that the descendants may not be interested in taking over the business. Today's younger generation often does not want to spend all their time at work like their parents. If parents delay involving their children in the business, the offspring may develop a career outside the family business in the meantime, and taking over the business will not be attractive to them.

Owners in some industries have trouble finding successors—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 commercial risk: family businesses often benefit from the image of a family business with a strong story, which customers appreciate. If, due to a mishandled handover, the company has to change owners at short notice or ceases to exist altogether, not only will the family name be lost, but also the trust of customers built up over generations.

Summary of risks if succession is not addressed in time

Unexpected departure of the founder	Threat of chaos in management, decision-making freeze, and inheritance disputes.
Breakdown of family cohesion	Conflict between siblings or widow/widower and children over control of the business.
Loss of key employees	Uncertainty about the future can lead to the departure of managers and experts.
Decline in company value	Long inheritance proceedings or internal disputes can cause a loss of business opportunities and a decline in the value of the company.
Failure to take advantage of tax benefits	Delayed resolution may prevent optimization (e.g., gifts during lifetime are not made in time and the share is subject to complicated settlement).
Possible liquidation or forced sale	In extreme cases, if no one is able to take over the company, it may be sold at a disadvantage to competitors or cease to exist.

 

All these risks can be significantly reduced by timely preparation. Succession should not be considered a taboo subject—on the contrary, open communication within the family and the involvement of legal experts can protect family relationships and the company itself.

Recommendations: how to successfully transfer a company

1. Start early and plan the process as a project: Don't leave succession considerations until late in life. Ideally, start planning when the founder is around 50, when they still have the energy to pass on their experience and, at the same time, the generation of potential successors has grown up.

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

2. Involve the family and communicate: Succession affects the whole family, so bring up the topic in good time. Find out which of your descendants are interested in the company and what their ideas are. If several children want to run the company together, discuss how they will divide the roles.

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

The need for open communication and listening is emphasized—surprisingly, many problems arise when succession is not discussed and it is simply assumed that the children will "take over the reins." Regular family meetings about the future can prevent misunderstandings and strengthen trust.

3. Prepare your successor (not only in terms of ownership, but also management): Successful handover is not just about signing contracts, but mainly about transferring know-how, contacts, and responsibility. Involve your children in the running of the business as soon as possible, gradually delegate project management to them, and introduce them to key clients and partners.

Also allow them to gain experience outside the family business (internships, working elsewhere) – they will often bring a new perspective to the company. The successor should be respected by employees, so it is a good idea for the founder to introduce them in advance as the future leader. Consider setting up a family council or supervisory body that includes representatives of the older generation or external mentors.

4. Use experts – lawyers and tax advisors: The legal aspects of transferring a company are complex, and any mistake (invalid contract, failure to obtain approval from authorities, poorly handled options, 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 you choose the optimal procedure (e.g., whether to donate or rather set up a trust fund), prepare high-quality contracts, and ensure compliance with legal requirements. Similarly, consulting with a tax advisor will reveal any tax implications and savings opportunities—especially for larger companies, it pays to structure the transfer so that there is no unexpected taxation.

Experts can also help draft a family constitution or set up mechanisms to protect the family business (e.g., preemptive rights between siblings, prohibition on transferring shares outside the family for a certain period, etc.).

5. Be clear about your goals and be prepared to compromise: Be clear about what you want to achieve through succession – is your priority to preserve the family legacy at all costs, to secure your financial future in old age, or simply to ensure 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 an enthusiastic owner. Even such a step is better to take in a planned manner than under duress. However, 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 would 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 business today

The intergenerational transfer of a family business is undoubtedly one of the most important steps in the life cycle of a company. 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 needs of the family.

Whether you choose to donate a share, draw up a will, set up a trust fund, or choose another option, always keep in mind that this process must 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 consult an experienced lawyer or tax advisor. Professional assistance will help you avoid mistakes and find a solution that will ensure the prosperity of your company even after you leave.

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 achievements. A family business, handed over with care and love, can continue to grow and flourish—and that is the best reward for all your years of effort.

Start thinking 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, schedule a consultation. We will help you set up a succession strategy so that the company remains in good hands and the family remains 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.

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