The family company: Prospects for entrepreneurs | In Principle

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The family company: Prospects for entrepreneurs

Micro, small and medium-sized enterprises, often family firms, are the driving force behind the Polish economy and the hallmark of Polish entrepreneurship. But Polish law is not ideally suited to the specific nature of family firms. Hence new legal solutions are being proposed that would help family firms pursue their business in Poland.

The current legal system in Poland offers a limited number of forms for conducting economic activity, and the available forms don’t always meet the needs of businesses.

Needs of a growing family business

When an entrepreneur starts doing business in Poland on a small scale, he or she usually decides to operate first as a sole trader (also known as a sole proprietorship). This simple form has many advantages, but as the business grows it often proves necessary to take clear steps in another direction in order to manage business risks.

A sole trader is personally liable for obligations arising out of the business, and the consequences can potentially also affect the individual’s spouse. And over time it becomes necessary to protect what the entrepreneur has built up against the vicissitudes of health and mortality, which are bound to take their toll on the owner. One solution may be to incorporate the business as a separate legal person. This allows the family business to be continued by successors.

Incorporation now typically involves the business owner establishing a limited-liability company. But this may not prove feasible because of the tax and accounting burdens and the significant number of formal legal requirements.

So, either way, operating a family business in the form of a sole proprietorship or a limited-liability company will involve certain inconveniences for the owner.

An ideal solution would be to create a new form for managing a family business, combining the best features of these two popular business forms used in Poland with new solutions that already work well in other countries.

Legislative proposal: family company

Polish law should permit conversion of a sole proprietorship or partnership into a simple type of company while retaining the advantages of operating in either of these forms.

Introducing a simplified corporate form would be a relatively easy legislative operation and would be an alternative to changes enabling inheritance of an enterprise. A family company would also resolve issues unconnected with succession, such as limited liability for the owners, which would itself be beneficial to the economy.

Advantages of a company

A family company would have many of the advantages of a capital company, such as limited liability of shareholders and separate legal personality, which guarantees relative freedom in passing a family company on to members of the family and easing succession over future generations. Operating in the form of a family company would allow the members to earn income both from their shares in the capital and from their work in the company. In a family company, only individuals could be shareholders.

Advantages of sole proprietorship

At the same time, the proposed family company would not lose the benefits enjoyed by a sole proprietorship, such as taxation at the single level of personal income (with the company being a pass-through entity, transparent for tax purposes) and limited accounting. The right to use these simplifications would be limited by relevant thresholds of income and turnover.

Flexible framework

Meanwhile, in order to tailor the family company to suit the individual needs of the family, the company could offer to issue silent shares to passive shareholders not interested in participating in the family business. Such shares would provide the right to inspect the affairs of the company, the right to participate in the profit, the right to attend shareholder meetings in a passive capacity, the right to obtain information, the right to challenge resolutions, and the right to vote on changes in the subject of the company’s business or issues affecting the silent shares.

Proven solutions

The proposed form for conducting business, designed with family firms in mind, draws from proven patterns functioning for many years in other countries. Similar legal solutions are used now by family firms in such countries as Belgium, Denmark, Estonia, Luxembourg, the UK, and the US.

Offering businesses a new form of operations would resolve problems existing today and enable family firms to choose the optimal legal form to suit their needs. Entrepreneurs could ensure financial security for themselves and their families while maintaining control over the business they have built up, without the necessity to incur burdensome additional obligations.

Wojciech Marszałkowski, Private Client Practice, Wardyński & Partners