Don't make this mistake when transferring the family business
When it comes to passing down the family business to your children, the number one mistake is to transfer the business at a nominal value such as $1. If you proceed with this approach there will be major take implications as this will trigger a capital gain via a non-arm's length transaction ( i.e. the business will be deemed to be sold at fair market value). The solution to transfer your business to the next generation without triggering any tax implications is to use an estate freeze, we outline the benefits and process below.
How to determine the fair market value of the business?
We recommend that you work with an accounting & advisory firm will use the best practices to determine the value of your family business. Please refer to this link " How to value a business or asset", it outlines the process of how to value a business outing steps accordingly.
Use an Estate Freeze
The following benefits include:
-Transferring your family business to family members without any tax implications.
-Remain in control of the business.
-Tax planning for retirement and maintaining a regular stream of income in the future.
The process of an estate freeze is as follows:
1) Set up a holding company or family trust:
This step includes a new business structure to hold ownership of the operating companies shares and allows for the issuance of new shares in the business.
2) Re-organize the shares of the operating company ownership:
You will need to exchange your old common shares in the business and exchange them for preferred shares that have prescribed voting rights to maintain control as well as dividend rates. Your new holding company will now own the new preferred shares of the operating company.
3) Issue new common shares to your family members as part of the business transfer:
The last step includes issuing new common shares, that are non-voting either directly to your family members or to a family trust.
You still remain control of your business, however you have successfully completed a transfer of the business without any tax implications. Also, you still own preferred shares and can receive dividend income accordingly. You have essentially froze the the value of your business and have transferred the future growth of the business to your family members.
For more information, or if you would like to further discuss with an MP Group advisor please contact us at 416-214-0527, e-mail: email@example.com or visit www.mpgroupcpa.com