You have put a great deal of yourself into your business. The day will come when you will have to walk away from your business and begin a new chapter of your life. Businesses are often transferred from one family member to another. Here are some key factors to think about when transferring your business to a family member.
The Benefits Of Gifting
Will you be gifting the business to a family member or selling your business to a family member? There are several advantages with gifting your business. This tactic can reduce your real estate taxes. If the agreement is properly written, the gifting process can allow you to maintain a level of control.
The Buy-Sell Agreement
The buy-sell agreement works to put everything in writing. It is a mistake to forego a contract even if you are dealing with a family member. A buy-sell agreement adds clarity to the process. This will keep confusion levels low and the chances of success high. You will want an expert to create a document that outlines all relevant details. This document should include the value of the business, the amount you are paying for the business, who will stay on the payroll, and what level of involvement you will have once the process is complete.
Seller financing is common, especially when involving relatives. A private annuity is on option to consider. A private annuity permits you to spread payments out for a long period of time. It can even extend until the end of your life.
The Self-Cancelling Installment Note
It is possible to include a self-cancelling clause in the installment note. This can benefit your family in the future. If you were to pass away before making all the payments, this clause will confirm that the remaining debt can be attached directly to your will. If you are a parent selling your business to a child, then one of the key benefits of an installment note is that it keeps your other children from paying excess income tax on your estate.
Transferring A Business To A Relative And The IRS
When you sell a business to a family member you can expect the IRS to take a second look. The IRS does this because many past business owners have acted in an unethical manner. Make sure that every aspect of the sale is professionally done and that you have all your paperwork in order.
EBIT Associates can help you deal with the unique details that come along with selling a business to a relative. Every sale is different and every business is different too. We can help you avoid common mistakes and pitfalls.