Two Reasons Why Your Family Business May Need a Business Succession Plan

According to the Small Business Administration, about 90 percent of all U.S. businesses are family owned and controlled.  Unfortunately, only about 30 percent of these businesses pass successfully to the second generation.  What is worse is that only about 15 percent of those then pass to the third generation.  A comprehensive business succession plan can ensure that your business continues in the family for generations to come.

There are two important reasons why you should have a business succession plan in place.  First, a business succession plan provides liquidity for owners.  While some business owners have sufficient savings to transfer their business to the next generation, others rely entirely on their business for income.  For those relying on business income, it is important to ensure the company will be able to fund the owner’s retirement plan.  If the owner desires to transfer the company to a younger generation, periodic gifts and sale of stocks to these individuals over the years should be part of their business succession plan.

Second, a business succession plan may allow a client to minimize the impact of transfer taxes.  For example, if successors to the business include grandchildren, the federal generation-skipping transfer (GST) tax might be imposed in addition to the estate tax.  As the tax implications can be quite large without a business plan, your family may be forced to sell off company assets in order to pay the transfer taxes.  However, careful planning and use of estate, GST, and gift tax exemptions are essential to minimizing the aggregate affect of taxes on your business.

Please contact our firm, Lonich Patton Ehrlich Policastri, for more information on how to create a successful business succession plan.  Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may include legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.