According to Forbes Magazine in 2013, only 1/3 of family businesses successfully make the transition to the second generation. Don’t let your family business join the 2/3’s that fail. With a few easy steps, you can plan for a smooth and successful transition from one generation to the next.
The first, and easiest step, is to give some serious thought to what you would want your business to look like if a disaster struck you tomorrow. There are 2 key items to consider: who will own the business (shares of stock, membership in the LLC, or the assets of a sole proprietorship) and what individual do you feel is best suited to take over your role as Managing Member, President, CEO, etc. Without some advance thought, the State of Tennessee could easily divide your family business 1/3 to a surviving spouse and 2/3 to your children, which could result in your children voting to take actions that you (and your surviving spouse) would not have done otherwise.
Second, you’ll need to draft documents (or hire a professional to draft documents) to see that your succession plan is carried out. A simple Will is a good start—a Will can direct your Personal Representative (the individual you designate to gather your assets and distribute them) to transfer ownership of the family business to a certain person or persons. But a simple Will should not be the end of the succession plan in most cases. If your plan consists of division of the ownership of the family business (whether stock in a corporation of membership interest in an LLC), you will need to make sure you have a document in place to govern the relationship among the various owners, that document being an Operating Agreement or By-laws.
Third, tax considerations should be reviewed. For family businesses organized as S-corporations, the Internal Revenue Code limits the types of shareholders that may hold S-corporation stock. And even though Tennessee’s Inheritance Tax is nearing extinction (abolished for those dying on/after January 1, 2016), the federal estate tax remains in play for those individuals dying in 2015 with more than $5.43 million in assets ($10.86 million for married couples). With some careful estate planning, the federal estate tax can be significantly reduced and/or eliminated, especially in those estates where a significant source of wealth is a family business.
If you run a small business, give some thought to what you would like your succession plan to look like and contact our firm to review your estate planning documents (Will, Trusts, etc.) and family business By-Laws or Operating Agreement to ensure they will reach that result or if you have no estate planning documents and/or family business By-Laws or Operating Agreement in place. Because if you don’t have a succession plan, Tennessee has a default for you!