But how do you protect what you’ve accumulated until it does sell?
And after the sale, how do you protect what you receive?
Let’s consider the “after sale” part first. Sale proceeds can be structured all sorts of ways. What you’re after is the income tax savings. A capital gain isn’t all bad, but in the end, it is an income tax.
So one way of minimizing the tax is to not own or control 100% of the business. Now how can you own less than 100% and be safe? It’s common sense. Consider the 7th grade math: owning 50.1% still controls the business, same as owning 100%. So why face the taxes on the unnecessary 49.9%?
But who gets that 49.9%? Divide it up among family members. Children. Grandchildren. Other relatives. Trusted, valued employees who have an interest in keeping the venture going if you die, become disabled, or retire. You can even use trusts for any of these people if you’d like the economic benefit to go one way, but voting control to be held another way.
Another way of protecting the stock beforehand is to hold it in a “Family Limited Liability Company.” It can be owned by the same family members. And this wraps liability protection all around your stock. Will it make a difference to a buyer? Nope because the LLC will become the seller of those shares it owns, which is not a bad thing at all.
Here’s another valuable beneficiary: favorite charities. Or even more flexible is your own family foundation which will distribute income among the charities you and your family favor – and which can change over time.
You can even cross the 50.1% line for the max tax benefit – yes, own less than 50% — because of a business reality: if the other owners are happy, why would they take you out of control or fire you? They’re probably deliriously happy with how you’ve built the company up so it will sell. They’re not going to bite the hand that feeds them the dividends, the distributions, and soon, the sale proceeds.
Now there’s a catch in all this – isn’t there always? It’s a simple one and it’s almost common sense. Namely: you cannot start handing out shares after you’ve signed the contract to sell the company.
In other words, if the charity (or your foundation) is to get some of your largesse, and you’re looking for a charitable deduction, you’re not going to get it if the sale contract is already in place for you to sell the stock at $1,000 a share. The stock will go to the charity at that $1,000 price, giving you a net charitable deduction of zero.
Better: way before there’s a contract, give the stock to a charity or put the stock in a family foundation. Like when the stock is a mere pittance and the idea of selling the company is a mercenary gleam in your eye. This way, if the stock goes into your foundation at $10 a share, and later on, the company sells at $1,000 a share, $990 of proceeds will go tax-free into your charitable thing. And what did it cost you? Just that $10 a share.
The same idea goes for gifts and sales to people or trusts.
So strike while the iron is cold, or is starting to heat up. In fact, the more time between when you make the gift or sale, and when you eventually sign that contract to sell to a third party, the better.