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How a Business Tax Advisory Can Assist with Succession Planning


Why Should a Small Business Owner Have a Sound Succession Plan?

Business owners recognize that, on average, only 30% of small businesses survive into the second generation. No matter how you look at it, this tells you putting off the issue of succession planning for your business could be a costly mistake.

Aside from ensuring your successors consider your retirement needs, a succession plan also means the business you worked diligently to build is best placed to continue for years.

Now, it’s crucial to realize business ownership and management can be separate functions. Business owners may opt to transfer equal ownership of businesses to all their children, even when only one of them is involved in the day-to-day management of the organization.

When it comes to taxes, a sound succession plan should aim to minimize taxes in the event of a transfer, exit, or death of the business owner. So, how does a comprehensive succession plan alleviate or limit the above issues? Typically, such a plan helps set up a trouble-free transition between the owner and the successors.

Business planning is three-fold. It includes:

  • Ownership
  • Management
  • Taxes

A business tax advisory comes in handy to help you establish a foolproof plan for the seamless passage of business control to the next generation. By partnering with a professional tax advisor who’s conversant with local tax laws and regulations, you benefit from their know-how on issues of business taxes to grow your business. Plus, you get to keep your family-owned small business going, even after retirement or demise.

Why Establish a Succession Plan?

A succession plan is a long-term goal. Every savvy business looking to survive in the future must structure this succession document in precise detail.

That said, most business owners find themselves too engrossed in the day-to-day running of their organizations; to such an extent, they forget to plan for the inevitable transition. Else, other entities might not see the value of such an undertaking.

Having a strategic plan of succession is beneficial to both the business owner and the partners. Here’s why:

1. Limit Estate Tax

Tax laws such as estate tax regulations come into full effect upon the demise of an enterprise owner. If a succession plan does not exist, a chunk of the business value is transferred to the government through taxes. While Florida does not have local real estate taxes, federal laws might still apply. A CPA firm providing tax advisory services can help you understand how these regulations will affect your business. A clear succession plan is a critical factor in minimizing the concern of these taxes.

2. Maintain Control

Failing to plan for succession indirectly places the involved attorneys or the government as custodians of your business in the event of your absence. As a result, potential inheritors risk losing their share or have to go through draining legal battles to secure a percentage of the organization. But with a well-thought-out strategic exit plan, you get to determine who controls your enterprise after your demise. The best part, this tactic also ensures you maintain the business’s status.

3. Timely Estate Settlement

A succession plan eliminates the need to value the deceased’s business plus settle the partners’ shares as the share prices are agreed upon beforehand. Equally so, policy benefits rule out the possibility of external takeover stemming from cash problems. These benefits can be made available swiftly to pay the deceased’s estate share—eliminating the need for business liquidation.

Principles of Succession Planning

1. Successor Identification

How do you build an organization that will continue and flourish through multiple generations? In this context, you’ll need to consider successor identification and development.

First, remember people who understand the practical details of your business are the best placed to bring about better performance than individuals hired from outside the company.

Frequently, selecting new management from the existing employee pool is your best option when you want to ensure the transition goes according to plan. Having a solid estate planning process ought to allow you to execute this move seamlessly.

Let’s look at the main attributes you need to evaluate in a potential successor:

  • a person’s availability
  • expertise
  • character
  • dependability
  • capacity
  • leadership skills.

Plus, it’d be best if you began preparing the prospective managers for their future organizational roles as early as possible. This approach should benefit from training and mentorship programs to ensure the individuals are accustomed to the task when the moment comes.

2. Successor Empowerment

Identifying the most suitable individual to sit at the apex of your business is the most formidable challenge in creating a succession plan. Once you get the right choice, begin equipping them with the appropriate skills and critical information to support the organization’s success.

Progressive strategies for developing the leader(s)’ capabilities and skills should be enshrined in the succession protocol. Such a plan allows the individuals to run the business in the best way after your departure.

Noteworthy, the training should take into account the possibility of a leader or manager quitting the role before the intended period expires. The thinking behind such a backup strategy is to ensure no gaps exist in the management. Mind you, the clarity of the succession plan determines how flawlessly employees and family members will step up to the new managerial roles.

Leveraging Tax Advisory Services to Create a Succession Business Plan

Closely held successful family businesses often increase their cumulative net worth over time. Whether you understand the company’s current value in its entirety or not, the federal, state, and local taxes apply—making tax compliance mandatory.

It’s a given these tax laws will affect your liabilities as a business owner, even in the transition phase. Besides that, these tax guidelines will impact the manner of wealth inheritance among your family members once you exit the stage.

The federal tax-transfer system provides three layers of taxation that you ought to know about when you want to shield your business. These include Generation-Skipping Transfer (GST), gifts, and estate taxes.

While the above system is complex and possibly difficult to understand, a seasoned tax advisor can help dissect the relevant federal laws and ensure you build a healthy succession plan.

Tax Minimization Strategies

Tax exposure might arise during the inter-generational transition in the absence of a comprehensive exit strategy. This concern is especially so in family-held businesses—as estate and succession planning are entwined in such settings.

You need to consider multiple categories of federal, state and local tax applicable to your business in any event. So, be sure to work with a tax advisory firm to develop the best succession strategy limiting your organization’s tax exposure.

Here’s what you need to understand. Accurate determination of tax exposure and setting up mechanisms to ease it is the bedrock of an efficient handover strategy.

First, it requires you to calculate the current value of your estate then project the future worth of the business. At this stage, it’s essential to consider business tax advisory services, which will make tax planning much more straightforward.

What Is the Worth of Your Business?

To determine the dollar value of your business, you need a certified public accountant’s appraisal. This makes CPA firms an indispensable in the succession planning process for organization owners.

Business partners might assign arbitrary values to the estate shares in a collective agreement as a way of estimating property worth. But that’s not applicable for business shares that are publicly traded. Here, the valuation is dependent on the present market value.

Standard Succession Plan for Business Partners

Life Insurance

Life insurance provides instant liquidity of real estate without any tax implications in the event the insured dies. After determining the dollar value of the business, all partners purchase life insurance in the enterprise. Supposing one partner dies before the agreement expires? Here, the death benefit proceeds are used to buy the deceased’s share of the company. The remaining partners then redistribute the shares proportionally among themselves.

Which Life Insurance Arrangement Should You Adopt?

Cross-purchase and entity-purchase models of life insurance both serve the same goal. However, their utilization differs by circumstances.

Cross-Purchase Agreement

In this arrangement, each shareholder buys and owns a policy on every other partner in the company. As such, one partner becomes the owner and beneficiary of the same policy while the others assume the insured position. Every member firm will have the same benefits. So when one partner passes on, the value of each policy is paid to the remaining associates. The death benefit is then used to buy the deceased’s shares at a price agreed upon beforehand.

Even so, the structure of cross-purchase makes it complex and relatively impractical in situations where partners exceed five. As the number of partners increases, it becomes virtually impossible for one partner to maintain separate policies on all the others. Inequality in underwriting is highly likely to occur, leading to unfair policy costs.

Entity-Purchase Agreements

The entity-purchase model is much simpler. Here the business buys one policy on each associate and assumes the position of the owner and the beneficiary. Following the demise of either a partner or company owner, the enterprise purchases the deceased’s shares using the proceeds from the policy. The business equitably underwrites between partners.

Selecting the life insurance agreement to adopt may be affected by factors such as age between the partners. For instance, a business with two partners with a considerable difference in their age bracket will lead to a vast disparity in policy costs.

Plan Your Exit Strategy Now to Avoid Costly Slipups with the Assistance of a Tax Advisory 

Change of business ownership or management is inevitable for any closely held family business or transgenerational establishment aiming for future survival. For an effective succession plan, you need the tax advisory services of a reliable CPA firm in Clearwater.

Do you have a solid business succession plan? Our team can help you define the precise financial status of your business and plan accordingly to avoid excessive transfer taxes. Get in touch with BAAP CPA today. Our business advisor provides meticulous financial advisory services for any business owner within the state looking to create a succession plan.

You don’t want to go through this road alone. Call us at 727-530-0036 for a free consultation.

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