Many businesses in Kosovo are family-owned enterprises established during the 1990s or in the period following the war in Kosovo. Considering the economic and political circumstances of those periods, many of these businesses operated without a properly established organisational and decision-making structure.
Most decisions were made by the founder, often a parent or, in some cases, the eldest brother. Other family members performed various roles within the company and contributed to its development in different ways. In most cases, the entire family business and its assets were registered in the name of only one family member.
Based on our professional experience, we have observed that this model of corporate governance is increasingly proving unsustainable, making transformation essential for the survival of these businesses.
While the parent may have been the sole decision-maker when the business was established, 20 or 30 years later, grandchildren also wish to participate in the company’s decision-making processes.
Furthermore, the third generation is generally better educated and often proposes reforms to modernise the company. However, such proposals frequently face resistance from the founders, who rely on their many years of experience and the successes achieved by the company over time.
Although other family members may remain patient during the founder’s lifetime, following their passing, dissatisfaction accumulated over the years may emerge in the form of serious disagreements and tensions.
These problems become even more complicated when the business and other family assets are registered in the name of a single family member to whom the parent had temporarily transferred ownership.
Unfortunately, in many such cases, families have been unable to find solutions that would allow them to continue operating the business together. Consequently, businesses have been divided into several companies, often accompanied by damaged family relationships and lengthy judicial disputes.
Finding solutions to these problems is not easy. Nevertheless, we will outline several recommendations that may help reduce the associated risks.
1. Registration of Ownership Interests
Although family-owned, these enterprises do not necessarily have to operate as sole proprietorships, even though many are registered in this form.
A sole proprietorship does not allow other individuals to be registered as co-owners, as the business is registered in the name of only one person.
Therefore, the first step should be to transform the business from a Sole Proprietorship (B.I.) into a Limited Liability Company (LLC).
This transformation would also enable the registration of co-owners, allowing family members who contribute to the business to hold ownership interests proportionate to their agreed entitlements.
If the business is already registered as a Limited Liability Company, family members should agree on the distribution of ownership interests and ensure that these are properly registered.
From a legal perspective, the person in whose name the ownership interests or company are registered is considered their legal owner until the relevant registration is amended.[1]
In the event of a dispute, other family members may be required to establish their ownership rights through judicial proceedings.
Such disputes can cause significant difficulties for both the business and its co-owners and should therefore be considered a last resort.
2. Establishing Management Policies Through Company Regulations
In many family businesses, the company’s articles of association are treated merely as a document required by the authorities, without receiving the attention they deserve.
However, when disputes arise between family members, each party may seek to rely on the company’s governing documents to protect their interests.
For this reason, it is essential that family businesses treat their articles of association as a fundamental document governing their daily operations. These documents should be carefully drafted through consultation and agreement among the relevant family members.
The articles of association may be regarded as the constitution of the company, regulating its corporate governance, management bodies, business activities, authorised classes of shares, their nominal value, the number and rights of shareholders, procedures for amending internal regulations, and other important matters.
The Law on Business Organisations provides for the possibility of a company having more than one director or establishing a board of directors.
At certain stages of a family business’s development, it may be more appropriate for the company to be managed by a board rather than a single director, allowing important decisions to be made collectively.
Where a company establishes a board of directors, its articles of association should define the board’s powers, the number of members, their appointment procedures, terms of office, and voting arrangements.
Furthermore, adopting internal regulations governing the organisational structure and classification of positions, with clearly defined duties and responsibilities for every employee, whether a family member or not, would contribute to better organisation and greater accountability.
For this transformation to succeed, it should be preceded by identifying the family values that should be preserved, defining the company’s mission and vision, and developing a strategic plan outlining its future direction.
In this way, even when the family members responsible for managing the business change, the shared values, mission, and vision will preserve the company’s legacy and serve as guiding principles for the board of directors in managing daily operations and making important decisions.
3. Transparency and Accountability Through Corporate Governance
Problems within family businesses often arise from a lack of transparency or inadequate communication.
Because the business owners are family members, written decisions and formal agreements are relatively uncommon in such companies.
As a result, certain decisions may lack transparency and create dissatisfaction among family members involved in the business.
It is therefore necessary to establish an effective corporate governance and management framework that promotes transparency and accountability within family-owned enterprises.
Planning the transformation of a family business’s management and operational structure at an early stage represents an important opportunity to prevent the dissolution or fragmentation of the business while preserving healthy family relationships.
Accordingly, the proper registration of ownership interests, the establishment of a clearly defined management structure supported by internal regulations, and the promotion of transparency and accountability may be essential to ensuring the continuity of a successful family business.
These measures can also create the conditions necessary for its long-term growth and further development.
Florin Lata
Attorney at Law
Vokshi & Lata Law Firm
This article was originally published in the Hoja Business Excellence Newsletter.
[1] Article 40 of Law No. 06/L-016 on Business Organisations provides for the obligation to register changes in shareholders with the Kosovo Business Registration Agency.
