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The best way to handle a new business opportunity
Every year, this must happen a million or more times. What? A successful family owned business is presented with or dreams up a new business opportunity with good (maybe even great) profit potential. Maybe a new product. Or a new service. An old customer wants you to make part X; you’ve been making part Y for years. A new store. A new geographic territory. The possibilities are endless.
What does the typical successful family business do with these opportunities? Want to guess? The sad answer: Add them to its present business.
What’s the obvious tax result? More income taxes, with profits of the new business opportunity being taxed at the highest rate. Worse yet, it balloons the family wealth for estate tax purposes. Not a smart tax strategy. You are enriching the IRS, instead of your family?
Whether your kids are babes in arms or experienced business adults active in the family business, this is what you should do with these types of opportunities: (1) Let your kids get all or the lion’s share of the income. (2) Keep all or most of the value of the new venture out of your estate.
There are two basic way s to get this job done right.
Situation 1: You want the kids to own and control everything.
Situation 2: You want the kids to own the venture (for tax purposes), while you control the management.
This is the classical way of handling the first situation. Loan the kids (or their new corporation, Kids, Inc.) the money needed to fund the new venture. Or you borrow the money from the bank and then loan it to Kids, Inc. Charge the going interest rate. The kids can deduct the interest. If you like, you can gift the principal of the loan to the kids at the rate of $12,000 per year ($24, 000 if you’re married) per child.
The second situation is solved in about the same way as the first, except Kids, Inc. issues voting stock (say 100 shares costs you $100 and you own all of it) and nonvoting stock (say 10,000 shares, which the kids own at $10,000). Make additional loans as required. You own less than one percent of the value (for tax purposes) of Kids, Inc., but you have absolute control. Cool!
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Estate Tax Blog
by Irv Blackman
First and foremost, Irv Blackman is both a CPA and a lawyer. Irv is a tax guy. Stay tuned to the site by signing up for the RSS feed.
