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3 Huge Family Business Structure Mistakes

3 Huge Family Business Structure Mistakes

Choosing the right business structure can be confusing. The correct structure may hinge on how many employees you have, the type of business you’re in and even how much money you make. These factors, as well as evolving tax laws, can change over time, leaving many family business owners with business structures that simply don’t suit them (for instance, a corporation that should be a partnership). The following are three mistakes to avoid:

1. Misunderstanding how a business structure relates to tax savings. There are bigger differences between corporate structures than you may realize, particularly as they relate to taxes. The truly surprising piece of this puzzle is that you may not be—by IRS definition—the type of business you think you are.

Take San Antonio-based Auto Brite Company, for instance. From a tax perspective, the company was categorized as a distributor for car wash and auto detail supplies and equipment. But what they discovered was that, since the company made its own chemicals, they qualified for tax deductions as a manufacturer, which saved them money (learn more about Auto Brite Company’s story here).

2. Aiming for simplicity instead of efficiency. One of the biggest mistakes business owners make in this area is in transferring real estate (such as land and buildings) into a corporation, simply because holding all business assets in one entity seems like the easiest thing to do. The  problem with this strategy, however, is that corporate-level federal taxes are then collected on the real estate at the time of sale, once it is appreciated. Unless property values have declined since the real estate was purchased (which is highly unlikely), you’ll lose out in a big way. If the real estate is held in a C Corp, there could be even more to lose, since the property was taxed as it was placed into the C Corp and will be taxed again as it is sold.

Many family business owners default to a sole proprietorship, partnership or LLC because they are quick and easy (as well as free or inexpensive) to form. Others who do invest the time and money into forming a corporation will put all assets into that one entity. As your business grows and changes, it’s likely that more than one structure makes sense for different types of assets. It may not seem like a simple solution but it can lead to major business and tax efficiencies in the long run.

3. Not putting the exit plan first. A 2015 survey by CNBC and the Financial Planning Association found that while 78 percent of small business owners intend to sell their businesses to fund their retirements, fewer than 30 percent have a written succession plan. The other small business owners who prefer to keep the business in the family rarely have a written succession plan, either—or even basic estate planning documents like a will—in place.

Whether you plan to sell or pass down the business to the next generation, having an exit plan in place and structuring the business around that exit plan is the best way to keep taxes like capital gains taxes and estate taxes in check. For ideas on how to make it happen, revisit our articles “Succession Planning: Identify Your Company’s Leaders Early,” “It Can Take 10 Years to Retire Right, and Here’s Why,” and “Exit Strategies: A Lesson From the Trenches.”

Most importantly, don’t panic! The need to change business structures as your business evolves is common. For more information or for specific questions, feel free to contact us.

Image Copyright: seannel / 123RF Stock Photo




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