Passing on a Corporation Part 2

Here is the 2^nd and last part of our blog series on Passing on a Corporation.

One of the main areas to consider when passing on your corporation is the Fair Market Value (FMV) of the business.  All businesses should be transitioned at Fair Market Value at a time that will keep the tax low.  As the business gains ground, acquires more assets and becomes more profitable, the Fair Market Value gets higher.  So the longer you wait to pass on the shares, the more potential tax consequence there may be.  If you know for sure that you are passing on the corporation, and have great trust for the person/people you are passing it on to then why not consider giving them shares while the Fair Market Value is still low.  If they owned 50% of the shares for example, you’d be half way dealt with the issue when the time comes.  You do not have to make them a director just because you give them shares, meaning you could remain in control!  You may even want to give them 49% of the shares, so you keep 51%.  There are an unlimited amount of options here, but regardless of your plan, it is important to have a contractual agreement in place such as a Unanimous Shareholder Agreement (USA).

There are so many variables to look at when determining when to give the shares, how to give the shares and so forth.  A much more effective way to pass on your corporation is to set up a family trust, have the trust own the corporation (all or most of the shares), and then simply hand down control of the trust when the time comes!  This eliminates many of the tax issues you face as the shares would not change hands.  Please read more of my blogs on trusts and structuring to understand more of this.  One other great thing about doing it this way is in the case where you can clearly see things are not going to work you can simply remain in control of the trust and corporation and the shares still remain in the trust (nothing changes)!

Each business succession plan is unique and takes great consideration and planning.  However you will always keep those 4 things in mind when planning the succession: ownership, management, liability and tax.  Ensure you plan early, involve everyone early and really work hard with those involved to make the plan come to reality!  Call or email us to discuss your corporate, business and tax needs, we look forward to hearing from you!