Business Succession Planning: How to Secure Your Company’s Future

A business owner’s death or incapacitation can create uncertainties when it comes to making certain decisions regarding business. Whose responsibility is it to run the daily operations? What will be done with the business ownership interests? Will the business survive financially while everything is being sorted out?

The above questions will have different answers based on how the business has been structured, the agreements that were made by the business owner, and the estate documentation. However, without working on business succession planning, things can be very difficult for the family and business partners when it comes to operating the business during such a difficult time.

At WYCPA, we assist business owners in making the right financial and tax planning for business succession from preparation for transfer of ownership to analysis of possible tax implications and coordination of business arrangements with the estate plans.

What Happens to Business Ownership After an Owner’s Death?

Upon the event of death of the owner, the Canadian tax system tends to assume that the capital property of the owner was disposed of at the fair market value just before their death. Such deemed disposal of the capital property by the Canada Revenue Agency (CRA) can create a capital gain on the shares of the corporation, which needs to be included in the final tax return of the deceased. If the shares or capital properties were transferred to the spouse of the deceased, then the rollover provision would be utilized.

The effects vary depending on the business organization:

• Sole Proprietorship: The assets and liabilities related to the business owned by the deceased will have to be resolved as part of the estate administration process. There may be a need to pay off any outstanding creditors, file any required taxes, and determine whether the business will continue in operation or whether its assets will be distributed elsewhere.

• Partnership: The terms and provisions of the partnership agreement may determine whether surviving partners have any rights to acquire ownership interests from the deceased partner and at what value.

• Corporation: The corporation can usually continue to operate despite the death of one of its shareholders. The interests of the deceased shareholder will have to be administered as part of the estate administration process.
  

Who Should Take Over Your Business, and How?

Selecting a successor is a two-step process involving who will be the new owner of the company and who will be its manager. A family member could be the new owner of the business but does not know how to operate it, while a trusted employee or manager could run the operations but cannot afford the business due to lack of money. The succession plan is based on the owner’s preference, the willingness of the successor, the value of the business, and the funding sources to finance the process.

Some of the common succession plans involve:

• Family succession: The transition of the business ownership to the owner's children or other relatives. One needs to evaluate their readiness to accept this responsibility, business skills, and capacity to manage the enterprise.

• Buyout by management/employees: Sell the business to one of the managers or employees who knows all about the business. Determine the sale price and whether the buyer can pay for it from his own means.

• Partner buyout: Have the remaining partners or shareholders buy out the stake of the leaving owner. This process needs to be addressed in the governing documents of the organization.

• Sale to an outside party: Sell the business or its stock to someone else.
  

What Tax Consequences Can Arise When Ownership Transfers?

The manner through which a company is sold can impact how much tax is charged on the seller and the tax cost that will be incurred by the buyer. At WYCPA, our expertise as a small business accountant Vancouver involves analyzing the tax consequences before the owner decides on whether to proceed with the transfer of ownership.

How Does the Nature of the Sale Impact Taxes?

While in the case of a stock sale, the buyer not only purchases the stocks but also acquires the liabilities of the business. In the case of the seller, he may be eligible for the lifetime capital gains exemption provided the stocks meet the conditions specified by the CRA. In an asset sale, certain assets of the company are being sold.

Why Is Estate Liquidity Important? 

The liquidity in an estate is the presence of enough cash that will be available to cover for the costs of taxes, debt, and other legal fees after the death of a business owner. Since much of the cash that the business owner will have will be in the form of shares in the business, then the estate may have problems covering these costs. Estate tax planning requires an assessment of such costs and preparing financially in advance. Business owners can look at their savings, life insurance, and debts to know how much money they have.

How Can You Prepare Your Business for a Succession?

Here are the initial measures you can take to create a succession plan:

• Identify the successor: Choose the person who will succeed as the owner of the company or a manager and talk about the matter with them.

• Get a business valuation done: Provide a good basis for transferring the ownership, buying out, or even selling your business.

• Check legal documents: Make sure that your will, shareholder’s agreement, partnership agreement, and corporate documents will help you to achieve your goals.

• Estimate the tax liability: Consult an expert on what capital gains you may have and what tax-deferred solutions you can use.

• Prepare for continuity of operations: Write down all procedures, financial responsibilities, contracts, and other vital information.

• Review the plan periodically: Do it whenever there are some changes in the ownership, value of the business, family situation, and corporate structure.
  

The above process can also be employed in finding out whether there is a need for professional evaluation of such specialized strategies as corporate reorganization, an estate freeze, and trusts, which all have their own specific criteria and implications.

If you would like help analyzing the potential tax consequences associated with your future ownership transition, please contact wycpa. Discussing these topics now may prove helpful in ensuring that no issues remain when it is too late to fix them.

Why Work With WYCPA on Business Succession Planning? 

Business succession includes issues of ownership, taxation, and financial requirements of the estate. WYCPA offers estate tax planning, corporate reorganization, and other tax planning services to assist business owners in evaluating these aspects prior to any ownership transfer. WYCPA advice on estate and trust tax planning for incorporated business owners also includes other important aspects of planning beyond the ownership transfer.

The services of WYCPA are useful to business owners in helping them with:

• Tax planning: Assess tax consequences that could result from the sale/transfer of ownership.

• Corporate restructuring: Assess structural changes that would help in business succession.

• Estate and trusts planning: Assess deeming, liquidity of estates, and future tax consequences.

• Financial planning: Assess the financial position of the business and any shortage of funds.

Key Takeaways

• Identify the ownership and management of the business in the event of your retirement, disability, or death.

• Jointly owning, selling, gifting, and transferring assets through an estate can result in different tax consequences.

• Ensure that you have sufficient money to cover any taxes, debts, and other expenses without having to sell the business hastily.

• Examine the wills, shareholder agreements, and partnership agreements to ensure they align with your succession plans.

• An accountant can help evaluate the tax liabilities, financial position of the business, and any funding gaps.
  

Conclusion

Proper planning could be useful in protecting your business from uncertainties that may arise when the ownership changes. Business succession planning would enable you to prepare your successor, determine any tax issues, and make financial arrangements for future payments. WYCPA can help you consider all these financial and tax implications before you transfer your business. Please contact WYCPA for further information on succession planning.