Transitioning a family business to the next generation very often involves gifting ownership. Here are some tips on gifting ownership to the next generation:
1. Gifting needs to be part of an overall succession strategy. While gifting ownership in a family business is very common, it would be very problematic to make a gift without it being part of an overall plan. Ownership provides important legal and financial rights in a company and it might not be appropriate for all family members to have these rights. In fact, casually giving all family members ownership might lead to significant conflict that in turn disrupts and harms the family business. Developing a thoughtful succession plan first and prior to gifting will help to avoid these issues.
2. Gifts should be made as equal as possible. If you don’t gift ownership to every family member, you should determine how to make equalizing gifts to those other family members. Family members who aren’t included in some way in the gift planning
will inevitably become jealous and resentful of the ones who are. This has the risk of causing conflict in the family and the business.
3. Properly document the gifts and new ownership in the family business. Gifting ownership in a company is fairly simple. It involves signing off a stock certificate or a document showing ownership of the entity. However, not documenting the ownership relationship that’s been created (with a shareholder or operating agreement) could lead to a number of problems. In the case of a S corporation, it could result in the loss of pass-through tax benefit and having to pay two levels of federal tax. It could also lead to other people (i.e. in-laws, etc.) who may not look out for the best interest of the family business becoming owners and having those important legal and financial rights. Addressing all these issues on the front end with an ownership agreement will eliminate these risks.
If you have any questions regarding gifting or succession planning for your family business, feel free to contact me at phmulder@cunninghamdalman.com.
