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«Features of building and transferring a business with an emphasis on a family business in the Russian Federation»

25 November 2021 года 10.00 – 13.00
Report

On the 25th of November 2021 Association of SMEs support centers of the Kaliningrad region, a partner of the project INBETS+ (“Innovative business transfers in the BSR+”) of the Interreg Baltic Sea Region 2014-2020 program, together with the Law Firm “Lemchik, Krupskiy and Partners”. Structural and Tax Consulting”) conducted Transfer Day in a form of a webinar “Features of building and transferring a business with an emphasis on family business in the Russian Federation”.

The webinar was held with information and organizational support from the Center for Entrepreneurship Support of the Kaliningrad Region and the Union “The Kaliningrad Chamber of Commerce and Industry”. The event was announced on the website and social networks of the Center and the Association of SMEs support centres, as well as a mailing list was carried out on the contact database of entrepreneurs of Centre and the Chamber of Commerce and Industry of the Kaliningrad Region (Please see the Announcement attached in Annex 1 to the report).

The first decision taken in September 2021 was to arrange the event in person format, but due to limitations caused by corona virus pandemic it was reconsidered in the mid of November 2021 to hold Transfer Day in the form of webinar using the service webinar.ru. Please see the Programme of the webinar attached in Annex 2 to the report.

The webinar was attended by 22 participants, representatives of businesses and business associations, individual entrepreneurs, agricultural cooperatives, individuals who want to start their own business. Please see List of Participants in Annex 3 attached to the report.

The journalist took part in the webinar and wrote an article entitled FAMILY BUSINESS – TRUST BUT MAKE PAPERS. The article will be published in journal “Companies” in December 2021.

Summary of the webinar

Alexander Popov, the President of the Association of SMEs support centres of the Kaliningrad Region opened the event and shortly presented the INBETS+ project and stressed the importance and timeliness of the Transfer Day topic in the present conditions.

The speakers of the webinar on business transfer were Elena MATVEEVA, head of the North-West branch of Lemchik, Krupskiy and Partners, Sergey USHAKOV, lawyer of the Moscow City Bar Association, Alexander YUDIN, head of the department for work with members of the chamber and support of entrepreneurship of the Kaliningrad Chamber of Commerce and Industry. They analyzed in detail the issues, court cases and practical legal situations related to the stated topic.

Elena MATVEEVA presented to the audience the report “Analysis of the main models of building and transferring a family business on the principle of spouse-spouse, parents-children. Practical recommendations for risk mitigation”. Please see the presentation of Elena Matveeva in Annex 5 to the report.
The speaker noted that the study of family business models has a number of features and, as a result, specific advantages and disadvantages. The advantages of a family form of business are the following: the presence of trusting relationships within the family, ease of decision-making, work for the future (long-term goals and continuity), high crisis resistance, efficiency, reputation and low staff turnover.

The disadvantages of a family business include a mixture of business issues and family interests, informal relationships, a difficult psychological environment in
the team (especially when relatives and non-relatives are involved in the company), a lack of discipline (arises due to the fact that a lot is forgiven to
relatives in the family business), the risk of losing key employees, the imperfection of the motivation system (often salaries and other motivational payments are determined by the owner at their own discretion and are not always clear to other team members), the uncertainty of roles (as a rule, there are no clear functional responsibilities in a family business).

Speaking about the peculiarities of the legal regulation of family entrepreneurship, Elena MATVEEVA noted that currently in the Russian Federation there is no definition of such a legal phenomenon as family entrepreneurship and business of spouses. And in its implementation, as a rule, the norms of civil, family, corporate, tax law are used.

Attempts are now being made to submit to the Ministry of Economic Development a draft of amendments to the law on small and medium-sized businesses related to family businesses. It is expected that special rules will be introduced that determine the functioning of a family enterprise and improve their situation – special tax regimes, family patents, additional measures of state support. This is done in order to reduce the risks of family business, the main of which are civil, tax and inheritance.

Then the speaker presented various models of building a family business and the risks arising in connection with this: “The main risk of a family business is divorce and division of property.” To minimize the negative consequences of such events, in her opinion, it is necessary to take a number of steps. In particular: the conclusion of a marriage contract, an agreement on the division of property, the conclusion of a property trust agreement, the drawing up of a will (including a joint one), the conclusion of an inheritance agreement, the creation of an inheritance fund, the development of a fundamental document of the “Family Constitution”, strict control of document circulation.

The next speaker of the webinar, lawyer Sergei USHAKOV, presented the audience with a report “Trust and Safety: Non-Obvious Legal Aspects of Family Business”. Please see the presentation in Annex 6 attached to the report.

Questions about the features of divorce, division of property, the risks arising from this and the possibility of minimizing them were considered. “The topic is more than relevant. In the last seven years in the Russian Federation, more than 65% of divorces per hundred entered into marriages,” the speaker said. In the event of divorce, issues of the division of jointly acquired property are also resolved. Today’s rise in divorce rates is fueling an increase in property disputes. Businessmen are responding to this situation by increasing the number of prenuptial agreements. The last three years have been almost a geometric progression.

The expert also recalled some of the provisions of the family code relating to the property of spouses and gave examples of its division in case of divorce, including the division of shares in a business. The features of the division of the company, represented as LLC and individual entrepreneur, the division of funds on the brokerage account of one of the spouses and other special cases were considered: “Most of the risks associated with the division of property, shares in a business and business obligations in a divorce can be eliminated or minimized in case of concluding of a marriage contract or an agreement on the division of property.”

At the end of the webinar, Alexander YUDIN presented to the audience the project of the Kaliningrad Chamber of Commerce and Industry “Development of a family business”. Please see the presentation in Annex 7 attached to the report.

“According to a survey by the RF Chamber of Commerce and Industry, 74% of small and medium-sized businesses in Russia are family-owned companies. In the Kaliningrad region, the family business promotes the image of the region, creates new jobs, stimulates employment, develops new areas of the regional economy, and guarantees the employment of youth and pensioners. The development of the family business is the key to the stable development of the region’s economy,” he said.

Webinar takeaways

  • Currently in the Russian Federation there is no definition of such a legal phenomenon as family entrepreneurship and business of spouses.
  • Attempts are now being made from the side of the Ministry of Economic Development of RF to improve the legislation related to family businesses.
  • Special rules are expected in Russia to be introduced that determine the functioning of a family enterprise and improve their situation – special tax regimes, family patents, additional measures of state support.
  • The main risk of a family business is divorce and division of property. To minimize the risks and negative consequences it is advised to make the following steps: the conclusion of a marriage contract, an agreement on the division of property, the conclusion of a property trust agreement, the drawing up of a will (including a joint one), the conclusion of an inheritance agreement, the creation of an inheritance fund, the development of a fundamental document of the “Family Constitution”, strict control of document circulation.
  • Most of the risks associated with the division of property, shares in a business and business obligations in a divorce can be eliminated or minimized in case of concluding of a marriage contract or an agreement on the division of property.
  • The development of the family business is the key to the stable development of the region’s economy.