Good News for Entrepreneurs? REALLY?

Good News for Entrepreneurs? REALLY?

Article by Bea Wolper

The market tanked again! Expenses are up; revenue is down. Everyone is worried about recession. Many industries are experiencing a down cycle. What can be good?

For those owners who are thinking about passing some of their ownership interest in their company to another person, either to family members or nonfamily employees, there is no better time than right now.

When the company is not valued as high as you believe it could be, due to market conditions, the time may be just right to take advantage of the depressed price. Transfers can be accomplished in many ways, depending upon who and why one wishes to transfer ownership (and in what form.)

If the family business owner desires to transfer some of his or her ownership to the next generation, one method may be by gift. During 2008, every person can gift $12,000 to any other person without tax ramifications (and if the owner is married, the gift to the third party can be $24,000.)

Likewise, if the closely-held or family business owner desires to sell some of his or her ownership to a family member or an employee, the transfer may be by a sale or bonus. This may be the time to reward or cement loyalty to those individuals who remain during hard times.

To accomplish a transfer, a recent appraisal of the company is desirable. To transfer an asset to a family member (what the IRS deems an “applicable family member”), an appraisal obtained from a qualified appraiser is necessary in order to substantiate fair market value. The IRS assumes that any transfer of assets to a family member will be for less than fair market value. The appraisal helps prove that the fair market value is correct. It is recommended that the appraisal be done by a third-party accounting firm or other qualified appraiser, certainly not the accounting firm regularly engaged by the company, in order to have independent judgment.

The application of “discounts” is appropriate for arriving at the fair market value for the transfers of closely held stock. The amount of the discount is often disputed by the IRS; however, lack of marketability discounts and minority interest discounts in the range of 35 to 45% are usually appropriate. Working with your tax professional, a discount can be applied to fair market value in order to arrive at the value per share for transfer.

Outright sales can be structured for a low down payment, with payments at the minimum allowable interest rate for many years. And, more good news: the capital gain rate is at 15% for at least this year! Another method of transferring interests is employee bonuses. If the company gives a stock bonus to its employee, then the company can deduct the bonus, and the employee will pay tax on the value of the stock (which may cost less than buying the stock.)

Once a determination is made that a transfer is advantageous, then the appropriate buy-sell agreement should be adopted by the company and the shareholders or interest owners. The company and the owner will want to make sure that the company can get the stock back from those persons who no longer work in the company, for any reason. Executing the buy-sell should be presented
as a condition to receiving the stock or interest.

And so, why should this be done now? Because, when this “recession” bubble is over, and the pendulum swings so that the company is worth a lot more, owners will have successfully transferred assets out of their estate and lowered their estate taxes.