Can I Sell My Sole Proprietorship to My Kids?
You worked hard to build your business for yourself and your family. It is time to pass the company to the next generation. However, what would seem to be a simple task of “giving” the business assets to your kids could create tax liabilities and other legal problems for you and your kids. The best way to avoid problems is to consult an experienced Maryland business lawyer about the best way to transfer your sole proprietorship to your children.
What Is a Sole Proprietorship?
Before we review how you can transfer your business to your children, it helps to understand the structure of your business. A sole proprietorship is a business entity not incorporated. It is not a partnership or formal company. Instead, one person owns all the business assets and assumes all business debts.
In other words, “you” are the company. The business assets are considered the owner’s personal property. Also, the business debts are the owner’s personal debts. A sole proprietor’s personal assets can be levied or seized to pay unpaid business debts. In addition, the owner is personally liable for any lawsuits against the business. All business profits and losses are reported on the sole proprietor’s individual income tax return.
Because a sole proprietorship is an extension of the owner, it would seem that the easiest way to “sell” your business to your kids is to give them the assets and let them take over operating the business. However, gifting the business to your children either now or after your death through your estate might not be in your or your children’s best interest.
Ways to Sell Your Sole Proprietorship to Your Kids
There are several ways to transfer your business to your kids. First, you give the assets to your children and let them assume running the business. You leave the business assets to your children in your Will. Another option is to enter a buy-sell agreement to sell the company to your children for a specific price.
Each of the above ways of transferring business ownership to family members has advantages and disadvantages. The easiest way to transfer the business to your kids is to give them the business assets. However, giving assets away during your lifetime could result in gift taxes. In addition, receiving the assets as gifts could result in future tax liabilities for your children.
Creating a purchase agreement to “sell” the business to your children can provide a higher level of protection for all concerned. A Maryland business attorney can help you draft a sales agreement that minimizes taxes for all parties while addressing other issues, such as outstanding liability, DBA names, fair market value, allocation of the sales price, and use of a promissory note or installment agreement.
Another option is transferring the business assets to a trust for the benefit of your children. A trust agreement can provide added protection from creditors and other parties who might try to attach the children’s interest in the business assets. In addition, a business trust can help ensure the company you worked hard to build remains within the family. You could use many types of trusts, each with various advantages.
Consider Your Children’s Wishes Before Transferring a Sole Proprietorship to Them
Transferring a family business to multiple children can be complicated. One or more of your children might not want to be responsible for the business liabilities and debts. They might have no interest in operating the business. However, they might feel they are “owed” a portion of the business as their inheritance. In that case, a business lawyer could assist you in drafting an agreement that transfers the sole proprietorship to the children who desire to operate the company while providing for your other children in some other way.
Another consideration is what happens to the business if your child passes away or becomes incapacitated. What happens to that child’s share of the company? While you hope these events do not occur, it is wise to have a business plan in place that addresses these concerns. If not, the company you worked to build could be torn apart.
Although hard to believe, your kids might not want to operate the company. So an honest conversation with your children is the first step in selling a sole proprietorship to your kids. The next step is to meet with a Maryland business lawyer to discuss the best way to transfer the company.
Contact Our Maryland Business Lawyer for More Information
Our Maryland business attorney helps you develop a strategy for transferring your business to your kids, creating the best benefit for your loved ones. Your kids also have access to a business lawyer who helps them with future business issues to keep the business profitable and successful for the next generation. Contact Steve today.
