Planning for the Owner Managed Business
PUBLISHED: 11:55 16 December 2011 | UPDATED: 20:27 20 February 2013
A study was carried in the US that demonstrated that only 33% of family companies survive from first generation to second and only 15% to the third. It's even less in the UK with 24% from first to second and only 14% to third.
Planning for the Owner Managed Business
A study was carried in the US that demonstrated that only 33% of family companies survive from first generation to second and only 15% to the third. Its even less in the UK with 24% from first to second and only 14% to third.
Price Waterhouse Coopers survey in 2007/08 showed 49% of family businesses have no succession plan in place.
Fear of death, family pressures, fear of retirement or an inability to choose an heir may all contribute to why no succession plans are put in place.
A lack of planning may leave a business with heirs who are unprepared or uninterested despite the hard work and ambitions of the founders. Passing the family business on to the next generation is difficult; the ownership and control should be structured to protect the familys business from external threats (i.e. divorce, taxation, emotional susceptibility of family members) whilst ensuring the family can enjoy the fruits of that business and pass it on to their children or grandchildren or for their benefit.
The mechanisms to pass the business on whilst protecting both the founders and their families and the employees are varied and will depend upon the business and wishes of the family and the tax rules in force at that time.
One matter that should be considered is planning for the death of the owners. Once a plan has been put in place for the business then the owners overall estate planning goals will be clearer. Of course the business is likely to involve family members and the succession/disposal of the business is likely to involve either gifting or sale to a family member which will in turn have a significant impact on their own estate planning. Conversely if the business is sold, the owners own financial position will change dramatically from what it was whilst they were a business owner.
However, a good place to start is a will to at least ensure that the beneficiaries you have identified will receive your estate. A well planned will is the cornerstone to dealing with succession and taxation issues. It is however a two step process. Not only should your will contain a valid, tax efficient gift, but the companys incorporation documents should be checked to ensure that they do not prohibit the transfer of the shares in the business. The Articles of Association of a company sometimes contain an ability for the Board of Directors to refuse, without reason, to register a transfer of shares. A companys incorporation documents can be changed, it is not expensive and can also be an opportunity for a general review.
One factor that will be of huge importance is taxation. There are a number of taxation implications that the business owner will need to consider in his exit or succession plan but one point is particularly worthy of note in this article.
To encourage entrepreneurship, a form of relief from inheritance tax relief is available for certain forms of qualifying businesses provided they are held for a certain period. There are two rates available 100% and 50%. Business property relief is applicable for life time gifting of the owners business or if they die whilst owning the business. Whilst the rules are complex and a rather more sophisticated will than would probably be desired, would need to be put in place this type of will is well worth exploring as they provide an opportunity to maximise the amount that can be passed tax free to your children.
Not only does a well drawn will provide inheritance tax efficiencies but an up to date modern will is also essential to the smooth running of the business after the death of the business owner. The owners executors will assume control of the business however they will only have power to continue the business of the owner if they are given specific authority to do so in the will whether as a sole practitioner or a limited company for those in partnership the authority should be given in the partnership deed and this is another good reason for a regular review of the deed.
For further information please contact Sophie Endersby, partner and head of private client services at BPE Solicitors LLP on 01242 248222 or firstname.lastname@example.org