How to protect the future of your business after you’re gone
If you own your own Hawaii business, have you considered what happens to it on your retirement or death?
A business succession plan helps transfer control according to your wishes and carries out an orderly transition.
A well-thought-out plan also may minimize the tax liability for you and your heirs while meeting your financial needs.
Planning for the succession of your business should begin well before it becomes a necessity, giving you time for a smooth transition between the old and new management.
Factors, such as the succeeding owners, retirement and estate planning are important to keep in mind when developing your succession plan.
» Stock gifts are a way for an owner to transfer the business without incurring much transfer tax. The owner is able to take advantage of the annual gift tax exclusion of $12,000 for 2008. Spouses can consent to splitting the gift for a total exclusion of $24,000, annually. The business owner is able to transfer the business to whomever he or she wishes tax free when using this method. However, the owner needs to be ready to surrender control over the company and forfeit future dividend income.
» A family limited partnership (FLP) is another way of gifting the business. The business will be transferred to the FLP and the owner will then be able to gift interests in the FLP to other family members. These gifts, as with the stock gifts, are subject to gift taxes.
Gifts to an FLP may be allowed a valuation discount. This discount, along with careful timing of the gift, can result in a reduced gift tax.
FLPs are an especially good planning idea for a business that is rapidly appreciating. Keep in mind that there needs to be a non-tax business purpose in forming the FLP to take advantage of the benefits.
» Another option is an Employee Stock Ownership Plans (ESOP). ESOPs should be created for reasons other than business succession planning; however, succession planning can fit into the objectives of an ESOP.
An ESOP is a qualified retirement plan in which the majority of funds are invested in the company's stock. It can be used to accumulate the cash that is needed to acquire or redeem the stock of a retiring business owner.
The advantages of an ESOP include the ability to deduct cash contributions and dividend payments made to an ESOP and its ability to be used a financing vehicle. ESOPs, however, have high administration costs.
If you don't have anyone inside the company or family that wants to take over the business, you may want to consider the option of selling to an outsider. This alternative may result in a change or close of the business, but sometimes the benefits of selling outweigh that downside. Also, competitors can sometimes offer the best price.
Liquidation is generally the last resort during business-succession planning because the business ceases to exist. In a liquidation, assets are valued and sold, and the proceeds are then used to pay off any outstanding liabilities.
A well-thought-out business- succession plan will enable you to leave the legacy you want and achieve your retirement and financial goals. The more time you allow for research and planning, the smoother the transition will be.
Deneen Nakashima is a senior tax manager for the Honolulu office of Grant Thornton. She can be reached at Deneen.Nakashima@gt.com