Family Business: How Children Can Earn Their Equity

Source: AICPA CPA Insider

In this article, Heidi Bolger, CPA, ABV, discusses some of the issues business owners struggle with when deciding whether – and how – to transfer ownership of the business to their children.

On the one hand, from an economic and tax perspective, gifting is the best way to transfer ownership to the younger generation. On the other hand, there are benefits to having children pay for their interests, including:

• Children will better appreciate the value of their interests.
• Parents may need the payments to fund their retirement needs.
• Siblings and coworkers may view the ownership transition as more fair to them.

Even when business interests are gifted, however, there are ways to ensure that children “earn” their equity, including:

• Requiring them to work outside the family business first.
• Establishing individual development plans, complete with commitment and achievement milestones, to guide their careers and leadership growth over time.
• Using nonvoting shares and other tools to ease their transition to the privileges and responsibilities of ownership.

For the complete article, read “Should Your Clients Have Children Pay for Stock in the Family Business?”

From AICPA CPA Insider, November 7, 2011, http://www.CPA2biz.com.