3 ways for business owners to transfer their interest to others

On Behalf of | May 20, 2024 | Business Law

Those who have established a successful small business or a professional practice may hope to ensure the continued success of their organization. Succession planning is important to the organization’s continuity when an executive or owner leaves their position. A succession plan provides information about necessary training and might even help identify individuals capable of taking over someone’s role within the company.

In addition to a succession plan, someone who owns a business also has to think about transferring their interest in the company to someone else either later in life or after they die. The following are the ways to transfer business ownership to someone else.

Gifting

Many people decide to make a gift of the company that they own to a family member or a trusted subordinate who has helped develop the organization. It may be possible to transfer ownership directly to someone else as a gift in consideration for the work that they have already performed for the organization previously. People may need to consider gift taxes when exploring this option.

By providing owner financing

Particularly when a business may comprise a large portion of someone’s personal wealth, it may be patently unfair to simply give that resource to one beneficiary or family member. Instead of granting it free of cost to one person, the current business owner might decide to offer financing in which someone who wants to assume control over the company makes regular payments toward the acquisition of the organization. Owner financing can eliminate interests and prevent the possibility of a financial institution taking control of the company if someone defaults on a loan.

By using a will or trust to transfer the business

Some people would prefer to retain their ownership interest in a company for the rest of their lives if possible. They want to continue having a say in its operations and benefiting from its success until they no longer require financial support. Someone who wants to prevent their beneficiaries from selling their company might use a trust to oversee its transfer to the next generation. Trusts can be particularly useful when there are multiple beneficiaries who must share an interest in the company. Otherwise, it is possible to grant ownership of a company to one person using a will. The overall value of the company could potentially generate concerns about estate taxes, while the potential sale of the company could trigger capital gains taxes.

Considering long-term intentions and financial matters carefully can help someone who wants to plan for the future transfer of a business to choose the right method. Choosing the right method of transfer can be as important as selecting the right successor.