|FORTUNE Small Business:|
Passing on a family business
Giving your company to your kids could be more complicated than you think.
(FORTUNE Small Business) -- Dear FSB: My husband and I want to give our sons our sales business. It is a sales company with no employees, organized as a partnership. When we hand it over to our sons we don't plan to change the name. Will we need a new EIN # or state sales tax number?
- Nancy South, Mckeesport, Pa.
Dear Nancy: Wanting to pass it on is natural for any family business. The consequences, however, reach beyond just having to get a new EIN or state sales tax number. From the tax perspective "give" could mean "a gift" - and depending on how much you're gifting away, the taxman may want a share.
The gift, says Grafton 'Cap' Willey of accounting and consulting firm Tofias PC, will be calculated on the fair-market value of your business.
"A gift over $12,000 (or double that for a husband and wife) could require the filing of gift tax returns," he says. You may also have to consider state gift taxes.
Exactly how you transfer your business to your sons is also important, since a partnership is technically considered terminated if more than half of the ownership structure changes.
"If the transfer is not handled properly, it could instead be considered a liquidation of the partnership which, in turn, could have income tax consequences that you and your husband were not expecting," says Jackie Perlman, a senior tax research coordinator with The Tax Institute at H&R Block (HRB). In a situation like this, new ID numbers and registrations could be required.
Usually, Willey says, a child is brought into the family business with a plan to transfer ownership over a period of time. Given the complications involved in such a transfer, both our experts advise that you consult a tax professional who has experience with family businesses.