In the Philippine landscape, family businesses are the backbone of the economy. However, the transition of ownership from one generation to the next is often fraught with legal complexity and emotional tension. Under Philippine law, the transfer of a family business is primarily governed by the Civil Code of the Philippines, specifically the provisions on Succession, as well as the National Internal Revenue Code (NIRC) regarding taxes.
1. The Concept of Compulsory Succession
The Philippines follows a system of Legitime, which limits the freedom of a business owner to dispose of their assets. A person cannot simply "disinherit" a family member or leave the entire business to a single favorite child if there are other legal heirs.
- Compulsory Heirs: These are the individuals whom the law reserves a portion of the estate for. They include legitimate children and descendants, the surviving spouse, and in certain cases, illegitimate children and ascending parents.
- Legitime: This is the part of the deceased’s estate that cannot be given away because the law has reserved it for compulsory heirs.
- The Free Portion: Only the remainder of the estate (after satisfying the legitimes) can be freely given to anyone through a Will.
Key Rule: If a business owner attempts to leave 100% of the company shares to one child in a Will, the other children can legally contest this if their "legitime" is impaired.
2. Testate vs. Intestate Succession
How a business is inherited depends on whether the owner left a valid Last Will and Testament.
A. Testate Succession (With a Will)
If the owner leaves a Will, they can designate who will manage the business and who will receive specific shares, provided the legitimes are respected.
- Notarial Will: Requires a lawyer, witnesses, and an acknowledgment before a Notary Public.
- Holographic Will: Entirely handwritten, dated, and signed by the testator. It is simpler but easier to contest regarding authenticity.
B. Intestate Succession (Without a Will)
If the owner dies without a Will, the law provides a default "hierarchy" of who inherits. The business assets are typically divided in equal shares among the children and the surviving spouse. This often leads to Co-ownership, which can be detrimental to business operations if the heirs cannot agree on management.
3. Modes of Transferring the Business
While succession occurs at death, many family businesses use "inter vivos" (during lifetime) transfers to ensure a smoother transition.
| Method | Legal Mechanism | Pros/Cons |
|---|---|---|
| Inheritance | Through a Will or Intestacy | Lowest upfront cost; high risk of family litigation. |
| Donation | Giving shares while alive | Subject to Donor’s Tax (6%); reduces the estate but may be subject to "collation" (bringing it back to the estate value upon death). |
| Sale | Selling shares to heirs | Subject to Capital Gains Tax (15% for shares not traded in the stock exchange); must be for "valid consideration" to avoid being seen as a simulated donation. |
4. Corporate Governance and the Family Constitution
When a family business is incorporated, the Revised Corporation Code comes into play. Succession is not just about who owns the shares, but who controls the board.
- Right of First Refusal: Many family corporations include provisions in their By-Laws stating that if a family member wants to sell their shares, they must first offer them to the existing family shareholders. This prevents outsiders from gaining entry into the business.
- The Family Constitution: While not a "law" in the strict sense, it is a legally binding contract if drafted correctly. It sets the rules for who can work in the company, mandatory retirement ages, and how disputes are resolved.
5. Tax Implications (The Estate Tax)
The TRAIN Law (Republic Act No. 10963) significantly simplified the tax burden on succession.
- Estate Tax Rate: A flat rate of 6% on the net estate of the deceased.
- Standard Deduction: A generous deduction of ₱5 Million is allowed, which can exempt many small to medium-sized family businesses from heavy taxation.
- Family Home Deduction: Up to ₱10 Million if the business is operated from or tied to the family residence.
Failure to pay estate taxes within one year of death results in penalties and prevents the legal transfer of stock certificates or land titles to the heirs, effectively "freezing" the business's ability to transact with banks or government agencies.
6. The "Collation" Rule
One of the most misunderstood rules in Philippine succession is Collation. Any property or shares given by a parent to a child during their lifetime (as a donation) is considered an "advance" on their inheritance. When the parent dies, the value of that donation is added back to the total estate to calculate whether everyone received their fair legal share.
7. Common Pitfalls to Avoid
- Co-ownership Deadlock: When five siblings own equal shares and cannot agree, the business stagnates. This can lead to a judicial "Partition" where a court orders the business liquidated to satisfy the heirs.
- Improper Valuation: Transferring shares at a price far below book value can trigger "Deemed Gift" taxes by the BIR.
- Ignoring the Spouse: Under the Absolute Community of Property regime, a surviving spouse owns half of the business assets acquired during the marriage, plus their share as an heir.