Making intelligent choices regarding business succession has never been more important than it is right now. With an economy in flux and a national corporate marketplace facing rising financial uncertainty, finding innovative solutions to grow and transition your business is a necessity. Through our innovative business succession tools, your company can put itself in a better position to achieve its most important goals, including succession planning, employee incentives, acquisitions, tax reductions and more.
Introduction to Business Succession
Business Succession at Kegler Brown is a comprehensive, dynamic and integrated system of business solutions that includes management succession, executive compensation, merger/acquisition, ownership transfers, tax reduction and estate planning. Each of these areas, in turn, has sophisticated tools that we custom design to meet your goals and objectives.
- Management Succession (including best practices in corporate governance)
- Executive Compensation (including non-qualified deferred compensation)
- Merger/Acquisition (including tax-deductible acquisitions)
- Ownership Transfers (including stock and asset sales and ESOPs)
- Tax Reduction (at both the shareholder and company level)
- Estate Planning (for both wealth preservation and business planning)
ESOPs and Business Succession
An employee stock ownership plan (“ESOP”) is a special type of qualified defined contribution pension plan under Section 401(a) of the Internal Revenue Code (the “Code”) that also meets the requirements of Code Sections 409 and 4975(e). ESOP provisions were first introduced by amendments to the Code in 1974 and were included in the Employee Retirement Income Security Act of 1974 (“ERISA”).
The primary application of ESOPs has been among closely-held corporations. Shareholders selling to ESOPs may be eligible for deferral or exemption from capital gains taxes while the corporation can fund the ESOP purchase with pre-tax contributions and pay principal on stock acquisition loans on a pre-tax basis. With an S corporation ESOP, both the corporation and the ESOP (as the shareholder) are tax-exempt and do not pay income taxes.
To understand the intricacies of ESOP formation and the specific benefits that it can have for your business, it is important to consult one of our experienced counselors.
The comprehensive advantages of forming an ESOP are too many to list. There are, however, three far-reaching benefits that result from the “ESOP Business Model” as a business succession tool that should be highlighted, including the following:
- Yields superior cash flow through substantial and on-going tax advantages;
- Facilitates best practices in financial controls and corporate governance; and
- Does not impair managerial control, even in a company owned 100% by its ESOP.
For more information on “The ESOP Business Model,” please view our detailed presentation.
Major Tax Benefits of ESOPs
- Exemption from corporate income taxes and from income taxes passed through to shareholders for an S corporation ESOP to the extent of ESOP ownership.
- Deferral or exemption from capital gains taxes for stock sold to a C corporation ESOP.
- Deduction for both principal and interest for a qualified ESOP loan used for the purchase of stock by the ESOP.
- Acquisition of another company by an ESOP company using pre-tax dollars.
Major Employee Benefits of ESOPs
- Gives employees a piece of ownership in the company and provides performance incentives.
- Facilitates positive employee participation in the company.
- Reduces employee turnover and increases retention.
Estate Planning and Business Succession
Estate planning and business succession go hand in hand. This is especially the case when a family business is involved. Among the issues to consider are the following:
- Gifting
- Life Insurance Planning
- Equitable Treatment of Active versus Non-Active Family Members
- Liquidity
- Wealth Preservation
- Wealth Transfers
- Trust Planning
- Retirement Plan and IRA Beneficiary Designations
It is critical to understand and plan for the liquidity needs of a family that owns a successful business. The starting point is usually getting the proper valuation of the business - this is key to proper estate planning. With this information, our firm can assist the family with life insurance planning, gifting, and strategic ownership of the business to address transfer taxes that may be associated with the death of the founder of the business. This planning must dovetail with effective business succession.
In the context of business succession, the people issues are critical to the estate plan. Once these issues are successfully addressed, we can then assist the family through utilization of tax effective tools to implement the plan. Among these tools are the following:
- Life Insurance Trusts
- Buy-Sell Agreements
- Split Dollar Life Insurance Plans
- Grantor Retained Annuity Trusts
- Sales to Defective Trusts
- Family Limited Partnerships
- Charitable Remainder Trusts
- Long-Term Rental Arrangements
An estate plan must take into consideration the unique factors associated with business ownership and the necessitated succession planning. The success of the f amily business is often critical to support the needs of the survivors of the deceased business owner. Whether or not a surviving spouse succeeds to the business, it is often the case that continuity of the business is important to provide the means to support the surviving spouse. A proper estate plan can often mean the difference between a successful or unsuccessful succession plan.