Before your biz is inherited, go over all of your options
Q: I am the sole owner of a successful construction business for the past eight years. Recently, my two sons joined the business. I am hoping to partially retire in the next three years. I would like my sons to eventually own the business and receive some income for my retirement. Should I sell the business to them now or in three years? Please let me know what’s my best option.
— Bruno, Mississauga
A: All business owners at one point in time must face this question “How do you leave your business to heirs?” Before handing over the company to your sons, there are many questions you need to ask yourself. Succession planning for the assets of a business requires professional help. The advice of an experienced professional accountant will consider your particular circumstance to determine what is best for you. It is not in your interest to receive advice of a complex nature and importance with a one- to two-paragraph e-mail and expect a cookie-cutter response. The interest in a business maybe the largest asset and income source for many individuals and it is important that they receive sound advice.
That said, freezing the assets of a business might generally give the desired results. An “estate freeze” is a method that freezes the current value of the business with the future increase in value of the business accruing to others.
Therefore, all future appreciation from the date of the freeze would be borne by your sons.
The choice of which method of freezing the interest in your business will be depend on many factors such as the size of the estate involved, the type of assets, how many parties are involved, tax consequences and continuance to maintain control of business.
Consider the following as you meet with your adviser:
Sale of shares to children: Probably the simplest method is a straight sale of the business to the kids. Your sons will own the business and you receive the cash for the shares sold. It’s simple. However, some issues to consider before moving forward with this method:
- You no longer have control of the business;
- Possible immediate tax consequences for capital gains (possible to use $500,000 lifetime capital gains exemption on small business shares);
- You may need a lawyer for the legals.
Use a holding company: Incorporate a holding company that can buy back the common shares of existing company. This can defer the capital gains tax on transaction to a later time. Inquire about cost of doing this.
A freeze within the existing company: A reorganization of the capital structure of the existing company may suffice without the use of a new company. This method might be less expensive.
None of the above should be attempted without first consulting with an experienced accountant and corporate lawyer.
Henry Choo Chong, CGA, provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304.