Key takeaways
- When company money is mixed with family money, the owner does not know the business's real profit or how much the family has spent.
- Personal expenses booked in the company carry tax risk, and interest-free director loans also need a justification.
- The solution is to separate the channels of money, set rules the family agrees on together, and prepare a family-side report alongside the company's financial statements.
Many family businesses start with one account and one pocket. The children's fuel, school fees, relatives' travel costs and the money the father takes to buy land all go through the company. While the business is small, this seems convenient. As the company grows and more family members join it, that single pocket turns into questions: which item belongs to whom, who has taken how much, and why one person has received more than another.
Many families have company financial statements signed off by the auditor every year, yet not a single page of family-side figures. The problem is therefore not the lack of financial statements, but the lack of a line separating what is a business cost, what is return for people who work, and what is return for shareholders.
Mixed money causes damage on three levels
| Tier | What happens | Effect on the owner |
|---|---|---|
| Management | Profit is depressed by expenses unrelated to the business | Pricing, branch evaluation and manager assessment rely on distorted figures |
| Tax and accounting | Personal expenses cannot be treated as company expenses; director balances stay outstanding for a long time without documentation | Back taxes, penalties, surcharges and questions from the auditor |
| Family | No one sees the same set of figures | Distrust builds up and erupts on the day shares are divided or the generation changes |
Section 65 ter (3) of the Revenue Code prohibits treating personal expenses as expenses when calculating net profit, and (13) prohibits expenses not incurred for the purpose of earning profit or solely for the business. Where a loan is made interest-free or with below-normal consideration without justifiable reason, the assessment officer has the power to set the consideration at market price under Section 65 bis (4). Interpretation depends on the facts; check case by case with the auditor or a tax adviser.
Example: where is the real profit?
Hypothetical example: a family company with revenue of THB 120 million and accounting profit before tax of THB 12 million. It has THB 3.6 million of family expenses mixed in and has lent a director THB 20 million interest-free. The 5% interest rate is a hypothetical figure used for calculation only.
| Item | THB million |
|---|---|
| Accounting profit before tax (margin 10.0%) | 12.00 |
| Add back family expenses | 3.60 |
| Business profit before tax after separating out the family (margin 13.0%) | 15.60 |
| Tax that may be assessed on family expenses (3.60 × 20%) | 0.72 |
| Tax on interest that may be assessed (20 × 5% × 20%) | 0.20 |
| Annual tax risk, before penalties and surcharges | 0.92 |
The key point is that the business has a margin 3 points better than the owner sees, while the family has spent more than anyone has ever totalled. Both facts become visible only once the money is separated.
Separating money through four channels
Money going from the company to family members should have only four kinds of justification, and each kind needs its own documents.
| Channel | Paid because | Principle |
|---|---|---|
| Salary and remuneration | Actually working | Compared with what an outsider would be paid in the same position |
| Dividends | Being a shareholder | Paid in proportion to shareholding and following legal procedures, from distributable profit |
| Rent or service fees | Letting the company use assets or services | Backed by a contract and a price that can be explained |
| Borrowing | Genuinely needing to borrow | Has a contract, repayment schedule, interest and a credit limit |
Once separated, the family side should have its own central account, an annual spending budget, and a one-page report showing which channels the money comes in through, what it is spent on, and in whose name the family's assets are held. This is the starting point of a family office in a practical sense, and it can begin with accounts and reports without setting up a new company.
What a family constitution should answer
A family constitution is not a decorative document but an advance agreement on difficult subjects, made while no one is in conflict. At a minimum it should answer: who may work in the company and what qualifications they need; how family members' remuneration is set; what the dividend policy is; what rights family members who do not work in the company have; who must be offered the shares first if someone wants to sell; and how disputes will be resolved. Binding matters should be moved into the company's articles of association, a shareholders' agreement or a will, prepared by a lawyer, because a constitution alone may have no legal effect.
Next steps
- Pull the last 12 months of transactions and separate family expenses from business expenses.
- Reconcile director loans and director receivables, and prepare a repayment or conversion plan.
- Consult the auditor and tax adviser on prior-period items before amending the accounts.
- Open a separate family account and stop paying personal items through the company from next month.
- Set family members' remuneration according to the work actually done.
- Prepare a one-page family report and hold a family meeting at least once a year.
- Draft a family agreement, then have a lawyer convert the parts that must be enforceable into legal documents.