Extensions Due -- Fiduciary 9/30/2023 -- Individual & C-Corp 10/16/2023
All in the family
Do you share a closely held business with your family, or maybe you’re thinking about starting a family-owned business? Either way, there are several financial and tax considerations to be mindful of when keeping everything in the family.
To ensure success when passing the family business from generation to generation (or family member to family member), it’s important to have a succession plan in place. A succession plan should include elements such as ownership transition that covers whether you’ll be gifting or selling shares; using trusts or other legal structures; creating a board of directors or establishing a family council to guide decision-making; and considering a contingency plan in case of unforeseen events, such as death or disability.
Family shareholders must have a shareholder agreement in place that outlines their rights, responsibilities and obligations. This agreement should include rules and procedures for transferring shares, decision-making and voting procedures, how dividends and distributions are allocated, maintaining confidentiality and non-disclosure of sensitive information, and provisions for terminating the agreement.
Compensation and benefits
To prevent scrutiny from tax authorities, be sure family members working in the business earn compensation and benefits that match fair market value. Remain compliant with applicable labor laws, including minimum wage, overtime and employment tax. Although they’re family, each member must be treated as a regular employee.
Capital structure and financing
Special consideration should be given to the capital structure of the business, which includes determining the appropriate mix of equity and debt financing. Several options include equity financing, debt financing, retained earnings, family loans, angel investors, strategic partnerships, private equity and government programs. Whatever you choose, ensure that any arrangements are structured properly to comply with tax laws.
Closely held family businesses may engage in transactions with related parties from time to time. This could include renting property owned by family members or purchasing goods or services from other family-owned entities. Be sure that renting or purchasing is at fair market value and is treated as though you’re working with a non-related party.
Family limited partnerships or LLCs
Some families may establish family limited partnerships (FLPs) or limited liability companies (LLCs) to hold and manage business assets. While both offer pass-through taxation (i.e., profits and losses of the entity pass through to the individual partners or members for tax purposes), FLPs offer more flexibility in income allocation. This allows for greater tax planning and potential tax savings. Otherwise, LLCs are subject to default tax treatment unless they elect to be taxed as a corporation.
Consult a tax professional
It’s important to consult a qualified tax professional specializing in closely held family businesses. They’ll help you navigate any complex financial and tax considerations specific to your situation and can provide personalized guidance regarding ensuring compliance with applicable laws and regulations.Back to issue