Do’s & Don’ts for Family Business Succession Planning

If you have a child who has been involved in running the business, you may still want to treat your children who are not involved in the business equally. It typically is a “don’t” to gift equal ownership shares to all of your children. This opens the door to disputes that can only be resolved by litigation. The siblings will likely disagree about salaries, benefits, bonuses and expense reimbursements. Additionally, the children working for the company are entitled to compensation, but their salary also reduces the amount of profits from the business. Complaints of excessive salaries typically occur between the involved and non-involved siblings. Even minor fights can quickly turn into large legal battles.

A “do” for avoiding litigation between your children is the creation of an Employee Stock Ownership Plan (ESOP). An ESOP can help your family avoid conflict as well as provide tax benefits. By using an ESOP, a business owner can place a monetary value on the ownership interests of the non-involved children. The children who are not active in the business never receive an ownership interest in the business, but instead, they receive payments through the ESOP over time.

Creating an ESOP can be a complicated process, but it can provide numerous benefits. It can help keep all of your children happy. Your child that is involved in the business can still maintain control. The children who are not active in the business can still receive payments. The business owner and their family benefit from various tax benefits.

To learn more about creating an ESOP and the tax benefits associated with it, or contact us to schedule an initial consultation. We are located in Sacramento County, and serve clients throughout California.

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