Updated July 21, 2015
Business Succession Planning in Chicago Illinois
Common mistakes made in small business succession and business continuity planning
There are three common mistakes:
-
Not finding someone who is capable of managing the business
We’ve all seen instances where the person who took over the business was simply incapable. This is certainly one of the saddest experiences that a public accountant can witness. You work for a successful business for ten years. The owner decides to retire. The person chosen to take over the business runs it right into the ground. Two or three years later one of two things happens. Either the old owner is back there working, or I’m preparing paperwork for a bankruptcy. Experience and ability are key. Just because you like this heir, doesn’t mean that they are in any way capable of guiding, managing, and mastering a business.
-
Taxes
If you have a capable heir, then the ever-present issue of taxes will consistently raise its ugly head. The transaction must be considered arm’s length, or bona fide. You can’t just give your business to your son, and expect not to have a taxable situation. The business is worth something. You may not think it is, but the IRS probably has a different opinion. If it is worth more than the annual gift tax exclusion, which is over $11,000 this year, then there are going to be either gift or inheritance tax issues.
The value of the business must be determined by a valuation completed by a valuation professional. That valuation specialist must follow the Internal Revenue Service Code in coming up with a Fair Market Value. If you normally could sell your business for $1,000,000, you cannot arbitrarily assign it a value of $200,000, and only pay taxes based upon the lower figure.
The transaction itself must be bona fide. Consideration for the business must be satisfied. If your heir does not have the money for the business, then you can certainly give it away, and face gift or estate taxes. If you make the common mistake of not following the rules, then the IRS can either unravel the transaction, or include the business in estate taxes upon your death.
-
Representation
One would think that this is simple, but it isn’t. Constructing, accounting for, and documenting an arm’s length transaction is quite difficult. You need an experienced, professional to guide you through this transaction. Without that professional, this process will probably fail.
If you are having problems with your Business Succession Planning in Chicago Illinois or have issues with your accounting in general, we would love to help. I enjoy hearing from my readers, and can be contacted at
Chris@AccountingSolutionsltd.com
Additional Accounting Articles and information on my firm can be found at
www.AccountingSolutionsLtd.com
Chris Amundson is the President of Accounting Solutions Ltd., a full service public accounting firm of Certified Public Accountants and Enrolled Agents handling the bookkeeping, accounting, tax preparation, and audit representation needs of Businesses, Estates, Trusts, and Upper Income Individuals.