Did you know that over 70 percent of businesses run by families do not make it through the transition from the founder to the second generation? This is the more reason to have a solid succession plan if a family-owned business is to pass from one generation to another. Retirement is inevitable for every person, whether it means not going to the office or settling down after accomplishing your goal in business. However, in the case of a family business, there is more to retirement. Before deciding that you’ve made enough money to last you through old age, you have to determine what happens to the business once you are done. Who is going to take over once you leave? How will the transfer of ownership take place?
The reason behind the collapse of family-owned businesses is family discord and taxes. A thorough succession plan should be able to cover these issues. One, if relatives are going to take over the company, the succession plan should facilitate a smooth succession between the founder and the future owners. However, these plans are often bogged down by emotions and relationships that are involved. Furthermore, discussions on financial affairs, aging, and death are still considered taboo among families.
What To Do
Most family-owned businesses are either partnerships or sole proprietorship. They are a tad complex when willing as their assets cannot be distinguished from the owner’s personal assets thus making them tough to pass on. This means that only the business’s assets can be able to be transferred. If your business falls under these categories and you want to will it to several successors, the best move is to create a corporation. A corporation will continue operating even after it’s a sale or after the owner passes on.
Upon turning the business into a corporation, there are three things that you’ll have to deal with: ownership, management, and taxes.
One, you have to distinguish between management and ownership which in most cases are not the same thing. For example, you may hand over management to one child while transferring equal shares of ownership to all the children.
Two, on taxes, your focus should be to minimize them upon death. There are various tax strategies involving asset transfer that can help you in this. These include having the value of your interest in the company frozen while a transfer is ongoing.
Your family-owned business need not go to the ground. Ensure you have a succession plan in place and seek the help of lawyers and accountants who specialize in succession planning to guide you in the process.