There many things to consider when developing and growing a business. Whether you business is new or mature, there are various financial solutions that will provide creditor protection, ensure the continuity, and save your tax dollars. These structures also provide appropriate business succession planning that can alleviate unplanned situations with key company individuals, partners or family members. It can also become an integral part of an estate financial plan. The plan your develop, under the guidance of trusted professionals which includes your lawyer, accountant and Insurance & Financial advisor, as it relates to your specific situation, can establish the most appropriate structure that best suits your needs.
Often businesses not only provide regular income, but also create a retirement reserve for the future. Protecting your retirement from lawsuits and bankruptcy is an important condition in your financial plan. Investing in life insurance backed funds, or purchasing a life insurance policy with an investment component, can potentially protect your reserve.
Another solution is to create a Holding Company that is owned by the business owner. This Holding company in turn owns the shares of the Operating Company which is known as connected corporations. The Operating Company can transfer shares to the Holding Company without incurring any tax. This structure has advantages in creditor protection because the retained earnings from the Operating Company can be as a tax free dividend to the Holding Company by removing excess cash and other assets so that it is not vulnerable to future creditors’ claims. The assets in the holding company can then be invested in a life insurance policy in a way that it can then potentially be accessed tax free. The insurance proceeds at death would create a credit to the capital dividend account of a private corporation which is then paid to your estate or shareholders upon the death of the business owner (insured).
Depending upon your family and personal financial situation, an even more complex method can still incorporate the Holding Company but also establishes a Family Trust. In a mature company with high share value, it is possible to freeze the common shares converting them to preferred shares, which can then no longer increase in value. This in effect freezes the income tax liability on these preferred shares which can now be paid for through a life insurance policy or by other funds. Any new growth is established with new common shares which can be assigned to the Family Trust and/or Holding company and still allow excess retained earnings to flow through as dividends to the Holding Company. This Family Trust, which includes family members like children or spouse, can allow for tax effective income splitting for dividends or on the sale of the business and can provide structure for business succession planning. The collective advantage is the use of the lifetime capital gains exemption for each individual on qualifying small business shares. This exemption is set at $800,000 in 2014 and indexed for inflation after that.
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Unfortunately, most business owners have no plans in place for continuity which could have tremendous impact on the surviving spouse and children. Imagine who will be at the new helm and can they do the job? The loss of a partner could also leave unplanned trail of instability. Buy/Sell Insurance and Key Person Insurance are essential parts of business structures. Planned and constant communication between all involved parties and family members is essential and lack of such can be the greatest destructive force of wealth. Even in the event of a sale of the business the purchase price can be driven down substantially when perspective purchasers perceive the lack of planning process. Business owners often consider that lawyers and accountants can manage things later…but often it’s too late and your true wishes may never be fulfilled. It may even cause family quarrels in light of reaching a solution.
The above discussions are greatly simplified, and may involve very complex designs and adverse consequences and should not be implemented without the guidance of a professional advisor. Consulting with a Tax Professional as well as an Insurance and Financial Advisor can provide the recommended strategies to organize your business affairs.
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