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Many options for leaving a family business

Shannon Affholter
Business Planning

As a business owner, you will one day have to decide when and how to step out of the family business. Fortunately, many succession planning options exist to help you secure your family and business’s future.

But selecting the right option means asking yourself some challenging questions about how—or even if—you want to leave the business to your family, and in what condition you want to transfer it to them.

For example, if family members will inherit the business after your death, you will want them to receive it at its full fair market value, unhampered by tax liabilities. You must plan carefully to account for income, gift, and potential estate taxes so that your beneficiaries won’t have to sell business assets to pay these costs. In other words, an effective succession plan must consider not only the continuity of your business to the next generation, but also the possible cost consequences.

One option: selling outright

One transfer option you may consider is selling the business outright. When you sell your business interest to a family member or outside party, you will receive cash you can use to maintain your current lifestyle.

As long as you sell the business for its full fair market value, the sale is not subject to gift tax. However, if the sale occurs before your death, capital gains tax may apply.
You can also transfer the business using a buy-sell agreement, which is a legal contract that prearranges the sale of your business to a willing buyer but lets you keep control of your interest until a specified time, such as your retirement, disability, or death.

When the triggering event occurs, the buyer, which can be a person, a group, or even the business itself, must buy your interest from you or your estate at the full fair market value.

You will also prearrange the purchase price and sale terms, eliminating the need for a fire sale if you become disabled or die unexpectedly.

Transfer your business to family

Additionally, you may choose to transfer your business to family members by creating a limited liability company.

This allows you to establish a partnership with both managing and non-managing interests. Initially, you retain the managing partnership interest for yourself, maintaining important control over the day-to-day operations; then, over time, you gift the non-managing partnership interests to family members.

This option allows you to transfer business assets today instead of in the future, when they will have appreciated, and thus realize significant tax savings.

These are just a few options for ownership transfer; many factors will influence the structure and cost consequences of a family business owner’s succession plan.
As you consider your options, you’ll need to answer the challenging questions and determine what kind of plan best meets your family and business needs.

The succession plan that’s right for you will address both financial and emotional issues and define how the plan will be executed.

Ultimately, the ideal plan also will give you peace of mind.

Shannon Affholter is a Senior Manager with Moss Adams LLP who deals primarily with business and management planning. He can be reached at shannon.affholter@mossadams.com or at 425-259-7227.