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Transferring Business Ownership

(August 2006) posted on Tue Aug 22, 2006

Four common scenarios that will get you thinking.

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By Marty McGhie

One of the most difficult decisions every business owner eventually must make is how and when to transfer business ownership. Perhaps because we all strive for some sense of immortality, we tend to procrastinate over these types of decisions for as long as possible.

If we choose to prolong these decisions too long, however, the transfer of business ownership, if not properly planned, will become problematic at best, and a complete disaster at worst. My goal here, then, is to provide some general options and stimulate some thought as to how and when you might decide to transfer your business interests.

Once you get serious about making some decisions about your long-term business plans, you need to retain immediate help from an expert-an attorney, accountant, financial advisor, or other. They will provide you with the support you will need to ensure your plan is properly executed.

Within the US legal system, there are countless ways to transfer the ownership of your business. For our purposes, I’ll provide basic information on just four of the more popular vehicles used: family limited partnerships, employee stock option plans, buy-sell agreements, and selling to an outside buyer.

Family limited partnerships

Family limited partnerships are most often set up with one or two general partners and the rest of the partners having status as limited, non-voting partners. The general partners are likely to be one or two or more business partners, or perhaps a business owner and his or her spouse; they control the partnership. The limited partners may be involved in the business, but they typically do not control or manage the business.

The partnership then has the ability to pass on partnership interest to the family members as limited partners through the use of gift tax and estate-tax exemptions. In recent years, these exemptions have been increased substantially. Regulations currently allow $2 million in estate-tax exemptions and $1 million in gift-tax exemptions. If you should choose to transfer your business interests to family members, this provides some flexibility in terms of how the business can be transferred and the timing by which this can happen, while still allowing you to maintain control over the business.

Employee stock option plan