Sooner or later, everyone wants to retire. However, determining what happens to the business can be as important as ensuring that you have enough money to retire on. Who’s going to manage the business? How will ownership be transferred? With family businesses, succession planning can be especially complicated because of the relationships and emotions involved and because many people are not comfortable discussing topics such as aging, death, and financial affairs.
Business Structure, Ownership, and Taxes
The assets of a sole proprietorship or partnership are indistinguishable from the personal assets of the owner. Separate the business from yourself by forming a corporation that can continue to operate after it is sold or after the owner has died. If transferring the business, it’s important to realize that management and ownership are not the same. You may decide, for instance, to transfer management of your business to just one of your children but transfer equal shares of ownership to all your children, whether they’re actively involved in operating the business or not. However management and ownership are defined, accountants and lawyers who specialize in business succession planning can provide advice about strategies to minimize taxes when the transfer takes place. By reorganizing your corporation to exchange your common shares in the business for preferred shares with a fixed value equal to the common-share value, you can pass all future capital appreciation and income tax liability on that future appreciation to your children while you retain control, and access to the current value of the business, in effect freezing the corporation.
Succession Planning Tips
Family is the primary emphasis of succession planning for many businesses. Whether you’re thinking about the future management of your business, how ownership is going to be passed along, or taxes, you won’t be able to help thinking about how your decisions will affect your family. Consider six key tips to have the best chance at a successful transition.
