You have spent years developing your small business, but have you considered what will happen to it once you are out of the picture? Unfortunately, a number of small businesses fall apart when their owners retire, become incapacitated or die. Develop a plan to protect your business' legacy, and ensure that it continues to thrive once it is out of your hands. Let's take a look at some of the most popular succession options.
Setting up a buy-sell agreement determines when you sell your business, who will receive your business and the sale price. Note that you can set the sale price as the taxable value of the business. Predetermining the price as the taxable value minimizes estate tax on the business.
Buy-sell agreements are common for businesses that already have multiple business partners, and you want to transfer your ownership to them. You can also establish buy-sell agreements with unrelated third parties. Be wary of drafting these agreements on your own. They can be tricky, and if you set up the agreement incorrectly, you may end up with tax code violations and negative financial consequences.
If you set up a private annuity, the business goes to a family member, or third-party buyer, who makes periodic payments to you for the rest of your life. You can also structure the annuity so the payments continue to a second individual for the duration of their life as well. This is a common approach if you want to protect a spouse or other family member after you pass. A private annuity is considered a sale and not a gift; therefore, this option will protect your assets from high transfer taxes.
Family limited partnership
To set up a family limited partnership, you transfer the business from your sole ownership into a partnership. You will hold the general partnership interest in order to continue managing the business. You then gift limited partnership interests to family members over time. Like a private annuity, gifting the business through limited partnerships allows for business transfer with protection from high transfer taxes.
No matter what route you take in transferring your small business to new ownership, consider involving an attorney who can ensure that you are creating a secure agreement that protects your business interests and propels the success of your small business for years to come.