ALP: I would like to share ownership of my business with my family to get them interested and shift assets out of my estate. Can I do that without creating problems?
This is a typical objective. To accomplish that goal, it’s a relatively easy process to create voting and nonvoting interests. Children can be given nonvoting interests, while the owner retains the voting interests and can still set salaries and decide when and how much to distribute to shareholders. Such an approach is fairly common.
A better approach might be to separate the business into two pieces. One would operate the business and decide what goods or services to provide, markets to serve, prices to charge, etc. (the “Business Entity”). The other would own certain assets needed by the business such as machinery, vehicles, or real estate (the “Asset Entity”). Asset Entity might acquire assets from Business Entity or a third party then lease them back, or it might receive them in a distribution from Business Entity.
Asset Entity could have voting and nonvoting interests as described above. Beyond that, the two entity approach has several advantages over the single entity approach:
- The rent paid to Asset Entity would allow it to build equity and have funds to distribute to its owners. Its Ownership could differ from Business Entity so the cash might be paid disproportionately to younger owners to cover educational and other costs.
- Claimants against Business Entity could not reach assets of Asset Entity.
- Rental deductions for Business Entity might be more beneficial than depreciation deductions, particularly for real estate.
- Some owners of Asset Entity could be in management. The experience might be a good preparation for moving into management of Business Entity.
- Salaries paid to owners of Asset Entity would not reduce income of Business Entity.
- The overall value of Business Entity may not be reduced by having assets it uses owned by another entity.
- Asset Entity could sell assets in a tax-free exchange for other assets that would not have to be used by Business Entity.
There are a several ways to transfer interests in a business to family members without giving up control. Using two entities might be better than one to accomplish that goal.