3 Estate Planning Items to Consider When Selling a Business
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North Carolina consistently appears at the top of national polls as a great place to live and work. A growing population, as well as a favorable business survival rate, contributes to this positive environment for small businesses. Businesses had a 36.6 percent survival rate for the ten-year period from 2003 to 2013, which was less than a percentage point below the national average during this period. This placed North Carolina 16th in the country for business survival according to the 2014 Annual State of Small Business Report produced by the Small Business Technology and Development Center.
With a growing number of entrepreneurs in our state, combined with a reliable survival rate, small business owners might encounter an opportunity to sell their business. Our estate planning lawyers produced several earlier posts on the importance of creating a North Carolina succession plan and the various business succession options available. Those who have a plan in place have a clear understanding of how the sale of the business may be carried out.
While many owners focus on the sale price and business asset transfer or disposition when selling a business, several other factors are important to consider. For instance, how will proceeds from the sale be managed, protected, and taxed? Here are a few estate planning items to consider and discuss with an attorney:
- Future heirs. If not structured properly, the proceeds from the sale of a business could trigger a significant estate tax burden on surviving family. Discuss ways to ensure that assets will pass as efficiently as possible to beneficiaries. Depending on the goals of the individual, this might involve trusts, Family Limited Liability Companies (FLLCs), or other tools with tax advantages.
- Trusts. Revise existing or create new trusts to manage proceeds from the business sale. In addition to shielding trust assets from estate tax matters, these tools can be designed to protect assets from creditor claims. In addition to protection and tax advantages, trusts also offer flexibility. Depending on the type of trust, beneficiaries may be revised as a later date.
- Income tax. Acquiring funds outright directly from the sale of a business might trigger income tax issues that could be minimized if the owner plans properly. The owner could take a two-step planning approach: Identify optimal tools for receiving and holding the assets, and maximize after-tax proceeds. Another item to consider: Perhaps the terms of the sale involve retaining a small stake in profits. How will this long-term stream of income affect tax responsibilities?
Selling a business might prompt the seller to start another venture. Earlier this year the Internal Revenue Service published a new report on current tax laws and business entities. This may help an individual clarify tax requirements and select an appropriate business entity for their next venture.
By Attorney Samantha Reichle
