Handing Down The Family Business

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Making your Children Owners of your Restaurant Company

By Gerry E. Adams, CPA, CHAE

Making your children owners of your company is not only fraught with business and tax issues, but emotional issues as well. It is difficult to turn over ownership and control of a business that you have created and built over many years. In addition, no parent ever wants to be beholden to their children.

Throughout my career as an accountant, I have been fortunate to work with numerous family-owned businesses. It has given me the insight into understanding the universal issues faced by any parent wanting the best for their business and their family.

With this experience comes many “war stories” concerning generations of family members who will not speak to each other on account of power struggles triggered by inappropriate family planning. It is painful to watch and very difficult to fix. The primary reason for that is because you, the parent, at some point are no longer around to insist on the kids acting like adults and to keep the peace. This is sad, but true.

Bringing kids into your business is usually the first “real” opportunity you will have as a parent and business owner to really mess up! The rest of your estate and business succession planning is just “icing on the cake.” But there are many local success stories out there. I can think of at least 15 Seattle restaurant companies that are either being run by second or third generation members of the founder’s family, or companies that currently have the next generation on a track to run the company in the future. It is important to remember that it can be done successfully!

A Seattle succession planning consultant, Bruce Michels, has three rules for parents who are considering bringing their children in to run the family business.

  • They must complete a college education. The child must be qualified.
  • They must spend time working for another company. Three years is recommended before coming to work at the family business. This provides them with experience and humility.
  • If they are married, they must enter into a pre- or post-nuptial agreement with their spouse. This helps ensure that the company ownership will stay in the family.

In today’s environment, a fourth rule may be necessary…

  • No drugs, whatsoever. How can you ask prospective employees to take a drug test and not do the same of your children?

Assuming you have followed Bruce’s advice, how would you transfer ownership?

Consider creating a family limited partnership. It works this way: First, a new entity is created called the XYZ Family Limited Partnership. Into that entity, you contribute the ownership of your business, and generally take back a small general partner interest and the balance as a limited partner interest.

As you know, whoever owns the general partner interest effectively controls the company. So, it’s possible to own 1 percent as a general partner and control the entire company—even though the limited partners own 99 percent.

Next, you start a gift program by carving up your limited partnership interests into pieces and then giving some of those pieces to your children. Each year, you can give away more limited partnership interests. Your children can also purchase interests if they wish and you agree.

The benefits of this program are numerous. Your children get ownership while you maintain control. It’s an easy method to transfer ownership, because you transfer limited partnership interests, not the underlying business assets. Plus, you reduce your estate tax liability. In the end, someone must have ownership control just as you had, which means that you can’t treat all the children equally and fairly.

Note: This example is an oversimplification. The issues and options are numerous and must be considered carefully. Keep in mind that there are many other ways to admit children to your business — this is just one idea.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED TO BE A “COVERED OPINION” AS DESCRIBED UNDER IRS CIRCULAR 230. IT IS THEREFORE NOT INTENDED TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (1) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (2) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Gerry Adams, a Washington Hospitality Association Consulting Network consultant, is a CPA at Peterson Sullivan. He has 30 years of experience with the hospitality and food service industry in all aspects of business planning, taxation and assurance work.

 

 

Rev. 2/10/17

 


This article is an excerpt from the Handbook for Excellent Restaurant Operations (HERO), published by the Washington Hospitality Association.  Want a hard copy of the whole manual?  It’s one of the many benefits of becoming a member!  Find out more about joining the Washington Hospitality Association here.

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Categories: HERO