Here we present the basics of how to transfer business ownership to family member
One of the facts that remains unchanged about the business world is that everything is ephemeral. There comes a time in a business person’s life when you want to retire from a business, or to simply leave it whether for financial or personal reasons. This is usually hard to do particularly when you want to leave a legacy to your family. In such a case, transferring interest is usually a good way to leave your loved ones a stable and secure income source.
Interest refers to the percentage of stake you have in a company. Here are three steps you should follow when you want to transfer your share of ownership in your business to your family members.
First, Look up the Partnership Agreement
A partnership agreement outlines the procedure that any partner who wants to leave the business should take in doing so. It stipulates under what conditions a partner may be allowed to exit the partnership, and gives the rules and regulations he must follow during the process. By reading the partnership agreement which hopefully exists at the time of the interest transfer, you would know what is allowed and not allowed as far as transferring company interest is concerned. A partnership agreement would also be a roadmap detailing how the remaining partners should determine the value of the shares of the exiting partner. Should your business not have an existing partnership agreement, it can draft one before you transfer your interest. Alternatively, you could use a state-provided agreement as a guideline for the process.
Get a Valuation
The weight of a valuation cannot be underestimated when it comes to transferring interest. For the remaining partners, a business valuation of the business would be a good starting point to determine what your shares, as the leaving partner, are worth. A valuation would ensure that you and the other partners can calculate the fair market value of your shares so that whatever you are owed does not tank the business. Additionally, knowing what the business and your shares are worth could help you weigh the valuation discounts the recipient of your shares would enjoy.
Choose a Suitable Transfer Method
When transferring interest to family, you should be prepared to incur tax implication costs. Typically, transferrable interest is liable to gift, capital gain, income, and potential estate taxes. By choosing a method which limits the amount you would pay for these deductibles, you preserve the value of the interest. One way to transfer interest to a relative without suffering considerable tax drawbacks would be to gift your limited liability shares to your loved one as minority shares in a general and limited partnership. The shares would then be liable to valuation discounts and be transferrable as discounted interest. Another way to transfer interest would be to sell them to a family member while alive or to give instructions about the sale in your will. This method won’t save you as much as the discounted interest would, but it will preserve the continuity of the business.
You can get both formal and informal business valuations from our Business Valuers. Choose your preference and speak to us today.
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The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
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