Business Succession

Approximately 85% of my wealthy clients own all or part of a closely held family business. Sooner or later every family owned business must be transferred. An unplanned transfer, especially if caused by your death, is an economic and tax train wreck. Expensive. Impossible to fix. Unnecessary.

Better to have a Business Succession Plan in place. Following are the most common business succession strategies we see in practice for successful businesses:

• A tax-free transfer to one or more of the owner's business children.
• A sale to non-related stockholders or partners (brothers are considered non-related). Sale can be tax-free.
• A sale to one or more key employees (also can be tax-free).
• A sale to any person, group or company other than the above (sometimes can be tax-free).
• Rare but happens:
  • Goes public
  • Sale to an Employee Stock Ownership Plan
  • Liquidation

CAUTION

This website only covers the first strategy. If you are interested in more information for any of the other strategies contact Irv (click here) directly.

Why selling stock to your family is a no, no

You want to sell your business to your son (Sam). Each $1 million of the price (just substitute your own real price) is subject to three taxes:

1. Sam must earn over $1.6 million: at 40%, the income tax is $600,000… only $1 million left.
2. Sam pays you $1 million for your stock (assume zero tax basis). Your capital gains tax is $150,000… now only $850,000 is left.
3. At your death, the IRS gets another $467,000 for estate tax… only $383,000 is left. It's nuts! Sam must earn $1.6 million (or more) for your family to receive $383,000 (or less).

NOTE

The tax rates might change, but the horrific tax results will not. Better to do the tax- free strategies discussed on this website.

BURN THIS INTO YOUR MIND

The capital gains tax you must pay is bad enough when you sell your business to your kids. But the worst tax is the income tax your kids pay ($600,000 in the above example). Not only is the tax huge, but your kids lose the time value of that tax money for the rest of their lives. And remember, of necessity, your kids are a full generation younger than you. Compound the lost tax dollars for the life expectancy of your business-buying child. Use any rate you like. The number you get should convince you to never, never, sell your business to a younger family member.

Nonvoting stock — the road to control and tax heaven

Typical objectives:

• Transfer your business (you own more than 50 percent of the stock) to your kids during your life.
• Maintain control of the business for as long as you live.
• Minimize (or eliminate) the tax cost of any transfer.

Keeping Control

Actually, nonvoting stock is not technically a tax strategy, but without it, the other business succession tax strategies can't be done. Our years of experience prove it is an essential ingredient in almost every Transfer-of-a-Closely-Held-Business Plan.

HOW IT'S DONE

The owner (Joe) turns all of his stock (common) into the corporation and takes back two types of common stock in exchange — voting common (say 1,000 shares) and nonvoting common (say 100,000 shares). This transaction, called a "recapitalization," is tax-free and works for both C corporations and S corporations.

Joe then sells or gives the nonvoting stock (using a tax-free transfer strategy) to his kids. Usually over a period of years. Then, Joe can own as little as 1 percent of all the stock (1,000 shares of voting stock in this example) and still retain 100 percent of the voting control. Just what he wanted — low value, high control. Perfect!

Call Irv at (847)674-5295 for assistance with developing your Business Succession plan.