You have spent years building your small business. But have you taken time to consider what will happen to it when you retire, become disabled, or pass away? It is often hard to fathom an event that may not occur for many years. But it is important to put advance plans in place for passing down a family business. The failure to do so could result in the eventual loss of the business. There are several factors you should keep in mind in making plans for the future of your small business.
#1 Identify a successor(s).
Many small business owners plan to transfer their business to a child or children, or sometimes, grandchildren eventually. If you have more than one child, it is important to consider which of them wants to fill your shoes—and if they have the skills to do so. It is important not to assume control of the business will go to the oldest child. The continued success of the company requires the next generation taking the reins to have business acumen and commitment.
#2 Consider having the next generation participate in the business before transferring ownership and management duties.
For the continued success of the business, your successor(s) should be trained to run the business before your departure. This training can be accomplished over several years. After that, you can start transferring management and ownership of the business. Many business owners transfer management control of the business to the next generation first. They stay involved to a limited extent as an advisor, then shift ownership.
#3 Decide whether to transfer the business by a gift or a sale.
Each family must make its own decision about how the transfer should occur. But many business succession professionals recommend that the next generation has an economic stake in the business’ success by purchasing at least part of their ownership interest. If your successor lacks the funds to pay a lump sum for the business, the sale can occur as a buyout over the next several years. Alternatively, the next generation can work for the company at a reduced salary to earn their ownership interest in the business. There are several ways the transfer can take place. As business law attorneys, we can help you decide which option is the best one for your particular circumstances.
#4 If more than one child is well-suited to run the business, enable a smooth transition to multiple successors.
This transition can be accomplished by incorporating provisions for a smooth transfer into your partnership agreement or LLC operating agreement, for example. If one or more children are not interested in owning the business, consider providing an inheritance for them from other assets or making them the beneficiary of a life insurance policy.
#5 Think about your own needs for your retirement.
If you will need a continuous stream of income, consider continuing to play a limited ongoing role in the company for which you receive a salary. Another option is to require the next generation to purchase the business, providing funds for your retirement needs in that way.
#6 Plan with an eye toward minimizing your tax liability.
For example, one option is to transfer the business gradually by making gifts of shares in the business each year. These gifts are equivalent to the amount of the annual exclusion (currently, $15,000). We can help you transfer your business in a way that minimizes income, gift, and estate tax liability.
You have invested a lot in making your business a success. Thus, it is hard to think about relinquishing ownership or control of it. Nevertheless, planning is critical in creating a lasting legacy for your family. We can help in successfully passing down your family business to the next generation and ensure that you have a financially secure retirement. Contact our office today to set up a meeting.