Proper planning can help you ensure that the business you worked so hard to establish will be preserved the way you intended.
For instance, if you own and run your own business, you probably want to keep it within your family for generations. Another option is to sell it either before or after you pass away. No matter which one you choose, you need to carefully plan things to ensure that the business is protected from large tax liabilities.
In this post, your trusted family lawyer in the Fraser Valley shares what you need to know about succession planning for businesses:
What Are the Tax Implications of Succession Planning?
It is important to note that the process of succession planning can have a big impact on the taxes you have to pay. For example, if you leave your business to your son and later sell it, he will have to pay taxes on the capital gains he got from the sale.
What Is a Tax-Free Inter-Generational Transfer?
If you want to keep your business within your family, it is possible to transfer the business to your child without having to pay taxes. This is referred to as a tax-free inter-generational transfer.
Selecting a Successor to Your Company
The first step in succession planning is selecting a successor to your company, either an active or passive successor. Your successor will be the person who will take over your business. It is essential to choose a successor before you pass away.
There are two kinds of successors:
- An active successor is someone who has a desire to start or run a business.
- A passive successor is someone who inherits a business that they do not want to run or operate.
Leaving Your Business to Your Child as a Co-Owner
Another common way of succession planning is having your business co-owned by you and your child. This is where you transfer the ownership of the business to your child, but you do not give him complete control. You can still oversee the running of the business while your child is actively involved. You can be the CEO or CFO (Chief Financial Officer) of the company, or you can remain as a partner, or you can even have an active role in the running of the company.
In this arrangement, the income taxes are divided between you and your child. This means that the income of the business will be subjected to taxes only once when it is first earned. This can reduce the tax burden on both you and your child.
Creating a Succession Plan
If you want to make sure that your business will stay in your family after you pass away, your lawyer can help you create a succession plan. This is a set of arrangements that you can put in place to ensure that your business will remain within the family.
A succession plan can be used together with a trust. A trust is a legal arrangement where you place assets in the hands of trustees, who will manage and look after these assets for a specific purpose.
A good succession plan can ensure that your business stays within your family. This can be done by transferring shares in the company to your children or other family members or by co-owning it with your children while you are still alive. Having a succession plan will also allow you to decide whether you want to have the business sold or to have it kept within the family.
It is important that you consult your family lawyer so you can be given the guidance you need as you make a succession plan for your business.
Dreyer and Associates Lawyers LLP is an established firm that specializes in family law in the Fraser Valley of BC. Contact us if you want to know more about making a succession plan for your business!