Are you considering giving a family member ownership of your company? This happens quite frequently, especially for smaller businesses. Here are some factors to take into account when you are planning and make decisions about a transfer.
Do you have a Solid Contract?
Although members of the same immediate family might be tempted to forego a written contract, doing so is never a good idea. A buy-sell agreement you draft can maintain the lines of communication open between the parties. Make sure your documentation is comprehensive. It should encompass a wide range of information, such as the payment amount, your post transaction involvement, value of the firm as well as payment terms and conditions.
Does Your Family Member Require Financing?
Seller financing is frequently used when selling businesses to family members because the most likely acquirers are the owners children who do not have adequate liquid capital to purchase the business outright. You might even think about accepting a private annuity. Both methods allow payments to be stretched over a long period of time. Giving financial support has the advantage of generating a consistent income, in addition to the loan’s interest. There can also be tax advantages in avoiding large lump sum payments. Conversely, offering a seller note does create a receivables risk to the seller.
You can also think about including a self-cancelling provision in your installment notice. In the event of your untimely death before the payments were finished, this would allow debt to be attached to your will.
Are You Selling or Gifting Your Business?
Given the tax advantages, it happens more frequently than you might imagine to transfer a business to another family member without financial consideration. Additionally, you can still exercise some control over a business after gifting it.
The annual exclusion from gift taxes in 2022 is $16,000. The $12 million lifetime gift exemption cap applies. The good news is that after you transfer your firm, any future growth of the business won’t have an impact on your finances, even though you might incur some federal gift taxes if the sums exceed the exemption limits.
Is every detail correct?
Unfortunately, a lot of business owners have unethically or illegally transferred assets to relatives. As a result, the IRS scrutinizes certain types of transactions more closely. You will want to ensure that all your paperwork is in proper order and as accurate as possible as well as being compliant with current tax codes.
To help you with this, you should consider retaining the aid of a accountant and an attorney familiar with business transactions. A business broker or M&A expert should be used to detwermine the fair market value of the business and can assist you in understanding the specifics of how different structures will impact all parties financially.