Building up a small business is a huge success and one that you should definitely be proud of. Now that you’ve gotten your company off the ground, it’s important to come up with a plan on how to transfer the business to your heirs. You owe this to your employees, your heirs, and yourself. While coming up with your exact succession plan will depend on your own personal situation, here are some pointers to keep in mind.
Protect Yourself First to Protect the Business
It’s easy to feel invincible, especially when business is going great. But what would happen to your company if you weren’t there to work tomorrow? Too many companies fall apart because something happens to the person running everything and the business can’t absorb the financial hit.
Make sure you are protecting your business with key man insurance, and disability insurance on yourself so that in case something happens, your heirs will have a bit of a cushion to learn how to run the business.
Start Planning as Soon as Possible
When it comes to succession planning, the earlier you start the better. First of all, it helps to get your children in the business so they can start learning how to run things on their own. You don’t want the next owner to have to learn everything on the job when you aren’t there.
This only gives you plenty of time to figure out the legal and financial needs for transferring ownership. Finally, starting early can help you save on taxes, as we’ll see next.
Prepare for Taxes
The IRS taxes the transfer of property from one person to another. This includes transferring ownership in a business. The IRS charges the gift tax when you transfer property while alive and charges the estate tax on transfers after you die.
As of 2013, you can transfer roughly $5,250,000 to your children without owing these taxes. There are other ways to transfer more money tax-free, but this is a good ball park figure. Most businesses stay under this limit and avoid taxes. However, it’s still a good idea to plan as you never know how much your business will end up growing plus the government could end up reducing this tax-free limit.
Starting to transfer over some of your business early can help you reduce these taxes. If you start giving away pieces of your business now, you won’t owe these taxes as the company becomes more valuable over time. If you only wait to transfer everything when you die, your heirs could be stuck with a significant tax bill.
Multiple Children can be a Juggling Act
If you have multiple children, passing on your business can easily become an uncomfortable subject. If all your children work for your business, it’s a bit easier to find a solution because then you can evenly split the company. But what should you do if only one works for your company while the others don’t?
This is a tough question to answer and comes down to how you feel personally. If you have a child that doesn’t want to run the company, it doesn’t make sense to give him or her part of the business. One possible solution is to get the working child to come up with a plan to buy out the other siblings’ shares when you retire. Another point to consider is whether to evenly split this value or give the working child a larger share because of his or her contributions. Once again, this isn’t an easy choice which is why you want to start planning early to give yourself plenty of time to decide.
Consult with a Professional
Putting together a succession plan isn’t easy and it’s definitely not something you want to get wrong. It definitely pays to work with a professional on this matter. Check with your accountant first to see what advice he or she has. Depending on the size of your business, you may also need to work with an attorney and/or life insurance agent that specializes in estate planning.
You’ve worked too hard on your business to have it fall apart once you’re gone. Be sure to use these tips so you can make a smooth transfer to your heirs.