Succession Planning for Your Small Business or Family Farm
When you are running a small business or family farm it is hard to carve out time to plan for the future of the business; however, there are important questions to think about: What will happen to the business when you pass away? How do you hand the reins over to the next generation? How do you treat your children equally? How do you maintain an income stream even in retirement? This post addresses some of the most common problems in succession planning for a small business or family farm.
Problem #1: You want the business/farm to stay in the family but some of your children are active in the business and others are not. How do you treat them equally?
Possible Solution #1: Recapitalize your stock into voting and nonvoting stock. Transfer nonvoting shares to your inactive children and voting shares to your active children. Now everyone has equity in the business/farm but the inactive children cannot out vote the active children.
Possible Solution #2: Transfer business equity to the active children and make equalizing transfer of other assets to the inactive children. If you don’t have other assets a great way to accomplish this goal is through life insurance proceeds.
Possible Solution #3: Transfer the business equity equally to all your children but include a redemption provision that allows the active children to buy the inactive children out.
Planning Tip: Often a business owner will want to transfer the business/farm to a child who actively works in the business as compensation for their hard work. Transferring a capital asset to a child “for work” can subject it to self-employment tax. It would be much better to give or sell the business/farm to the child from an income tax standpoint.
Problem #2: You want to retire but your business/farm is your main source of income. What if you don’t want to sell your business/farm outside the family but your children cannot afford to buy you out? What will your income stream be if you no longer have a salary from your business/farm?
Possible Solution #1: Recapitalize your stock into voting and nonvoting stock. Sell the nonvoting stock but keep the voting stock. Now you have some income from the sale of the nonvoting stock but you maintain control over the business/farm.
Possible Solution #2: Create contractually assured income. Give your ownership interest in the business/farm to the next generation but sign a contract as a consultant with the business/farm or a noncompete agreement thus assuring an income stream.
Possible Solution #3: If your business/farm operations are owned by one entity and the real property is owned by another entity, give your ownership interest in the business/farm operations entity to the next generation but keep your ownership interest in the entity holding the real property. The business/farm can sign a long-term lease agreement with the real property entity generating income to you.
Possible Solution #4: Sell your ownership interest in the business/farm to the next generation through an installment sale. They don’t have to come up with all the money up front and you will receive income over time. It could even be a self-canceling note that cancels when you die.
There are many things to think about in succession planning for your small business or family farm, including estate, gift and income tax ramifications, Medicaid planning, capital gains avoidance, the illiquid nature of the asset, future management of the business/farm, and creditor avoidance just to name a few. A good plan requires coordination between attorneys, CPAs, and key employees of the business/farm. The author and the entire team at Logan & Logan PLC are available to assist you in succession planning for your small business or family farm.
This blog post does not render any legal, accounting, or other professional opinion about your particular circumstances. This post does not create an attorney/client relationship. Because of the rapidly changing nature of the law, information can change and this publication may become outdated. Please contact Logan & Logan PLC to discuss your specific circumstances.