Passing on the Family Business
In starting a small business, some people have a long-term goal of making it the family business and passing it on to their children or other heirs upon death. Passing on the family business to heirs can be a challenging thing depending on how the business is structured, and expensive depending on how much the business is worth.
If the business is founded by family members working together as equal partners, then the question of how the business is to be passed on becomes easier to answer. The founding members of the business should explore business structures that allow the business to continue even after the death of one member with limited managerial interruption from other possible heirs. For example, general partnerships are dissolved upon the death of a partner, unless there is an agreement to the contrary. For a transfer of the business after death, it may not be a great idea to set up the business as a general partnership, unless there are other important advantages. Corporations do not generally end at the death of the founder, and the founder’s shares are transferred on through a will or through intestacy laws; therefore, this may be a better structure than a general partnership to ensure continuity in some cases.
Another approach to ensure that the business stays in the family would be to spell it out in the beginning. When writing up the founding documents of the business, be it a partnership agreement or an operating agreement for a limited liability company, the person or people starting the business can put in restrictions as to how the business interests are to be transferred in order to keep it in the family. For example, an operating agreement can specify that any transferability of ownership interest in the business can only be to other family members.
When considering how to pass on a business, tax considerations cannot be ignored. In fact, failure to plan appropriately can lead to expensive taxes for heirs, turning the transfer of the business into a burden instead of a blessing. In transferring shares or interests in a business to heirs, certain taxes may apply depending on if the transfer is made before or after death. Estate taxes are taxes that are imposed on the net value of a person’s estate upon his or her death, before it is distributed to any heirs. Some people may try to avoid the estate tax by gifting the property during their lifetimes, but, there are gift taxes associated with such transfers too. Note that the person making the gift is usually responsible for paying the taxes. Therefore, depending on the value of the business, or its anticipated value, the business owner may have to consider the best time to make a transfer of ownership interest to future heirs.
Contact Us for Legal Assistance
If you run a small business or as in the process of starting one, you cannot afford to do so without first considering the legal implications of running a small business in West Palm Beach, Florida. Contact a West Palm Beach business law attorney at the Law Offices of Larry E. Bray P.A. for a consultation today.