Estate and Succession Planning For Your Business: Plan Now, Save Later
Make sure that the foodservice business you built is protected with an estate and succession plan.
You have worked hard to grow your business into a successful enterprise. A secure retirement is on the horizon, and you have an enviable community reputation and legacy to leave your loved ones. Transitioning out of your business and protecting that legacy requires a solid plan.
Like a business plan, no one succession plan is right for everyone and discussions with your lawyer and financial advisors will be time and money well spent. For corporations where you and your family own the shares, consider the following options. (Publicly traded companies have special regulatory requirements that will not be dealt with here.)
Regardless of the size of your operation, you will want to consider a Will. It is the simplest way of passing on ownership of your business. Via your Will you will appoint an Executor who will administer your estate and distribute your property, including shares in your business or outright ownership if you are not incorporated. There may be tax implications. While this is a simple manner of disposing of business property, the Executor needs to be given sufficient discretion to distribute shares or the company to the intended beneficiary (or beneficiaries) in the manner you want that is also the most tax advantageous. That is why it is imperative to seek tax advice during succession planning.
Power of Attorney
A Power of Attorney appoints someone to manage your legal and financial affairs should you become unable to do so. They grant the holder the right to buy and sell property, open and close bank accounts and enter into contracts on your behalf. You can arrange it so that one or more persons are your Power of Attorney, and set it up so they can act independently or require that they act in concert. Power(s) of attorney can be enduring, or limited by time or specific transactions. If you become incapacitated, no one can act for you or make decisions regarding your business or property without obtaining a court order appointing them to be your committee or personal representative. In such an instance, having a power of attorney can substantially expedite business decisions without the necessity of applying to the court.
Business transition options
Share or asset sale
One option is selling the business. This is done by way of either an asset sale or a share sale. Sellers typically prefer to sell shares because they can take advantage of capital gains exemptions and the purchaser acquires all of the company assets and all of the liabilities.
By contrast, an asset sale allows the purchaser to pick and choose which of the assets they want and which of the employees they will take on. In an asset sale, the allocation of the purchase price amongst the various assets of the company may have a significant affect on tax liabilities.
Any consideration of selling a business requires competent legal and financial advice. You must also consider the employees who are affected. Most provinces have employment legislation with specific notice requirements for group terminations. If your workplace is unionized, there will be additional considerations. Even in a small workplace, liability to employees can be significant and must be considered carefully alongside competent advice.
Under the Income Tax Act, there is a deemed disposition of all your assets on death. This means Revenue Canada treats your death as if you have sold all your assets and taxes them accordingly. With smaller companies, this may mean that your estate is forced to sell the business to pay the taxes owed, known as tax liability.
A common strategy to avoid that tax liability is an estate freeze whereby your common shares in the business are exchanged for preferred shares of equal value. New common shares are issued to your children or beneficiaries. Future growth of the company then accrues to the common shares while the value of the preferred shares remains fixed. The preferred shares can be redeemed over time to fund retirement. Keep in mind that with an estate freeze, control passes to the owners of the common shares and may result in unexpected changes to the way the company is operated.
Winding up your business
Winding up is the process of selling all assets of a business, paying off creditors, distributing any remaining assets to partners or shareholders and then dissolving the business. It requires careful planning and should be structured to avoid, as much as possible, capital gains and the potential that Revenue Canada will reassess previously claimed deductions and demand more taxes. If carefully organized and executed, a wind up can reduce taxes and permit, in some circumstances, money to come out of the company tax free. If considering this option, keep in mind that you may still have obligations to employees, both in terms of notice and possible ongoing pension payments.
In all of the options outlined, careful planning with competent legal and financial advisors is critical to succession planning for your business. With such planning, a great deal can be done to make sure your wishes for your business are fulfilled.