Many North Carolina business owners are thinking of the day when they can sell or otherwise transfer their interest and move on to other opportunities or simply retire from the daily routine. While each case is different, many financial planners believe that one can start planning at least ten years before the planned exit date. This lead time can enable owners to take advantage of income and gift tax treatment as well as to begin planning for succession.
If the business is treated as a “C” corporation for federal income tax purposes, the owner may wish to elect to be an “S” corporation or another pass-through entity in order to avoid double taxation when the company is liquidated. However, any excess of the fair market value of assets owned at the time of the election over their cost basis may be subject to tax during the ten-year period after the election. For some owners, one motivation for establishing a business was to create an enterprise to pass on to family members. If that is the case, then a sufficient period of time should be allowed for the successors to gain the necessary managerial experience.
There are several strategies that can be employed to allow the owner to have a stream of income after the business is sold or transferred that could reduce income tax liability. Some involve implementation of deferred compensation plans, which must be created and in force for a period of time while the owner is still considered an employee for them to be valid.
Closer to the exit date, it will be advisable to get an appraisal of the business, particularly if ownership interests are to be given to family members as gifts. This will require an examination of the interplay between gift taxes and the estate and gift tax exclusion. An attorney with experience in business planning may be able to assist in the long-term exit strategy employed by a client.
Source: Forbes, “Now Is The Time To Start Your Exit Plan“, Steve Parrish, March 10, 2014