What a family business should write down: a checklist
A checklist of what a family business is tempted to leave unwritten: roles, pay, ownership, exits and succession, and which adviser to ask about each.
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Family businesses often run on trust and memory. That works until someone falls ill, a relative wants to leave, or two people remember a promise differently. This checklist lists the arrangements that are most worth writing down, and says, for each, who is usually the right person to ask.
This is general information, not legal, tax or financial advice. What is possible, required or sensible depends on how the business is organised, the family's community and personal law, the property involved and the rules in force. Use it to prepare questions for your own lawyer and chartered accountant, not to replace them.
What you should come away with
- Start with roles and pay: these are simple and need no lawyer to begin
- Check that the paperwork on ownership matches what the family believes
- A partnership does not legally need a written deed, but a written deed is generally advised
- Personal law on inheritance differs by community and has changed over time, so take advice
- Write down what happens if a relative leaves or dies, before it is needed
- Review the documents every few years, and when something big changes
1. Roles and responsibilities. Write down what each family member is responsible for, who reports to whom, who decides what, and what is expected on hours and attendance. State how roles will be reviewed and what happens if a relative wants to change. This is good practice rather than a legal requirement, and a family can do it on its own in an evening. It is also the easiest place to start, which makes it a good first step.
Pay and drawings. Record what each relative who works in the business is paid, and why. Record any regular withdrawals by owners and how they are accounted for. Record loans between the family and the business, in either direction, along with any terms. Payments to relatives have tax consequences, so ask a chartered accountant how they should be treated and recorded before settling on them.
Who owns what, according to the paperwork. Many families are surprised here. Find out whether the business is a proprietorship, a partnership, a company or a Hindu undivided family business, because the form decides which law applies and which documents make sense. Check who holds the shares or partnership interests, whose name the bank accounts, licences, registrations and leases are in, and whether the premises belong to the business or to an individual. Compare this with what the family believes. Differences are common and are worth finding out about now. A lawyer and a chartered accountant are the right people for this.
The partnership deed, if there is a partnership. Under the Indian Partnership Act 1932, a partnership can be formed without a written agreement, and registration of a firm is optional. However, an unregistered firm and its partners face limits, under section 69 of the Act, on bringing certain legal claims, and sources on partnership law generally advise having a written deed. Partners often rely on memory for years. A deed that sets out each partner's role, profit share, capital, powers, and what happens when a partner joins, leaves or dies saves a great deal of reconstruction later. Have a lawyer draft or check it.
Family arrangements and joint family property. The law here depends on the family's community. For Hindu families, property held jointly follows its own rules, and these have changed. In August 2020 the Supreme Court, in Vineeta Sharma v Rakesh Sharma, held that daughters have the same coparcenary rights as sons by birth. Other communities follow other personal laws. Courts have recognised that families can settle matters among themselves by a family arrangement, but whether a particular document needs to be registered depends on what it does. Do not guess. Ask a lawyer what applies to your family.
Wills. A will is how a person can set out what happens to their share. Without one, personal law decides, and that may not match what the person intended. Wills have their own legal requirements, so they should be drawn up with a lawyer. They also change as families change, so they need review.
What happens if a relative wants to leave. Decide in advance how their interest would be valued and by whom, how and when they would be paid, and whether they can sell to an outsider or must first offer it to the family. It is far easier to agree this when nobody is leaving.
What happens on death, illness or incapacity. Who steps in, with what authority, and who can sign at the bank. A plan for a sudden absence is not the same as a succession plan, and a family business needs both. Check which bank facilities, guarantees and licences are in the name of one individual, because those are the ones that cause the most difficulty.
How disagreements will be handled. Say who the family will go to first, for example an elder or an adviser everyone trusts, and what steps come before court. It is much easier to agree on a process when you are not yet in a dispute.
Succession and handover. Record, in general terms, who is expected to lead and when, what role a founder will keep, and how other children are treated. This is a matter of intention as well as law, so write it so that everybody understands what has been planned and what has not been decided.
Where the documents are. A document nobody can find is of little use. Keep originals safely, tell at least two trusted people where they are, and keep a list of all the accounts, licences, policies and agreements the business holds.
Review. Put a date in the diary, perhaps every two or three years, and review after any big change: a marriage, a birth, a death, a new partner, a new loan, a move to a company structure.
If writing things down feels like a sign of distrust, say so out loud. It is often better to present it as a courtesy: nobody should have to rely on memory, and nobody should have to defend what they remember. Then pick the first item from the list and do it.