When it’s time for you to retire from your small business, how do you keep it in the family? You might be surprised to hear that there are dozens of possible combinations of transfer and financing methods. Where do you get started?
At CSI Accounting & Payroll, we’ve helped small business owners keep their companies in their family for over 50 years. We know that the number of possibilities can be overwhelming, so we’re going to keep things simple by focusing on four of the most popular family transfer methods:
- Sale method
- Gift method
- Employee Stock Ownership Plan (ESOP) method
- Trust method
Sale Method
This is by far the most popular transfer method, even within family businesses. It involves selling the business at fair market value, often structured through a purchase agreement. It can be either a stock or asset sale, but stock sales are more common for larger businesses, and asset sales are more common for small businesses.
The sale method is the most beneficial to you because small business owners don’t generate most of their personal wealth through running their business; they gain it through the sale of their business when they retire.
The sale is structured as money upfront, payments over time or a combination of the two, depending on what is outlined in the purchase agreement. However, these payments may be subject to capital gains taxes.
This method can also benefit the buyer because they don’t pay any taxes on the sale, and they can make payments over time through a loan if they don’t have cash upfront.
If you’re interested in using this method, your accountant can help you. We’ve done this many times for our clients at CSI!
Gift Method
This is the second most popular method to transfer ownership within a family. It doesn’t involve exchanging money; the business is a gift in the form of stock or assets. A downside is that you won’t generate any retirement revenue like you would with the sale method.
This is often done as a reward when the recipient has put years of their own sweat into the business. Customers don’t really notice a change in ownership because the transfer is effortless and familiar. This method is typically only done for very small businesses.
However, there may be tax implications, including potential gift taxes ranging from 18-40 percent if you exceed the lifetime gift tax exclusion - much higher than capital gains taxes from the sale transfer method. Because of this, you need to have your business appraised and file a separate tax return.
This is another method that your accountant may be able to help you with.
Employee Stock Ownership Plan (ESOP) Method
If you employ a lot of family members or even think of your employees as family, ESOP fosters employee ownership through a retirement plan by selling shares to an ESOP trust. It’s a way to give back to your employees, but this method is unique and not widely adopted.
While employees gain ownership benefits and tax-deferred savings, it can be expensive for you to set up. The process also requires extra effort in the form of additional reporting, tax filings, and annual company valuations.
This method may involve working with financial or legal experts with the right experience and connections, but this is not something we handle at CSI. However, we can refer you to a trusted partner!
Trust Method
This method is like a buy-sell agreement: flexible and user-friendly. You set up trusts that allow you to continue to own the business while you’re alive, but you pass on ownership rights to designated family members when you're no longer around.
Essentially, the trust automatically divvies up ownership among family members in the trust. While trusts allow tax-free contributions and a smooth way to transfer wealth, they may also incur high trust taxes - up to 37 percent.
While this is not something we handle at CSI, we can refer you to a partner who can help you with this method of transferring your business.
Secure Your Legacy With CSI’s Expertise
When it’s time for you to transfer your small business, keep it in the family with the help of an accountant! Now that you know about the sale, gift, ESOP, and trust transfer methods, are you ready to check out monthly accounting services and have expert advice moving forward?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about what it’s like to work with CSI by clicking the image below:
