Why stronger aid for family biz inheritance could prove helpful

The owner of a nonferrous steel distributor in Seoul’s Guro district has seen his health swiftly deteriorate since last year. In a recent family meeting, he decided to pass on his company to his eldest son.

The entrepreneur, 62, has been working around the clock to develop his business since establishing it in 1980. “If the company is dismantled, our employees will lose work. I hope that the company that I devoted my whole life to will continue to grow for generations,” he said.

○ Most small business owners wish to pass down businesses to offspring

According to the Korea Small Business Institute, 87.1 percent of small and medium company owners say they hope to pass down their businesses to their children. The reasons include the maintenance of technology and management know-how and strong affection for their companies.

Critics call the inheritance of a family business to the founder`s children “inheritance of family wealth to the next generation.” But many analysts say it could pave the way for smaller companies to grow into bigger and more established corporations conglomerates, adding that technology developed by the founder is handed down to the next generation and thus helps develop domestic technology.

Sustenance of employment is considered as another benefit of family business inheritance. Researcher Shin Sang-cheol at the Korea Small Business Institute said, “A company that doesn`t disappear means that jobs are being kept. Employment through the inheritance of a family business translates to 2.5 times the job creation effect from the establishment of a new business.”

○ Consulting for family business inheritance surges

Many owners of smaller businesses want to pass down their companies to their children, but few are taking steps toward this end. According to a 2011 survey on the matter conducted by the Korea Federation of Small and Medium Business, just 25.5 percent of 314 small business owners nationwide polled were preparing to leave their businesses to their offspring.

For a son or daughter of a small company owner to inherit his or her parents` business, complicated tax affairs and the fostering of a successor in advance are required. According to a survey by the small business think tank, 66 percent of small company founders picked the tax burden as an obstacle to passing down their businesses, while 25 percent selected uncertainty over a successor’s business capacity.

In 2007, the government provided the legal grounds to support the inheritance of small and medium businesses by revising the Act on the Promotion of Small and Medium Enterprises. Because the provisions under the law remain too complicated, however, many entrepreneurs have given up trying to leave their businesses to their kin. Korea has no single company that has operated for more than 200 years, while Japan has 3,146, Germany 837 and the Netherlands 222.

Choi Yeong-joon, a certified public accountant at Dasol Accounting, said, “Though tax laws on the inheritance of a family business exist, provisions are so complicated and requirements so demanding that ordinary owners of smaller businesses can hardly afford to meet them.”

Other experts urge the reinforcement of oversight and educational systems to ensure that such an inheritance will generate positive effects, including continuous employment of staff. Jeong Dae-yong, a professor of small and medium business studies at Soongsil University, said “Education programs are provided at the government level in Italy and Germany so that successors can raise their managerial capacity. The criticism on the inheritance of wealth will ease only when the positive effects of business inheritance are generated.”

balgun@donga.com