New Partnership

Discussion in 'Growing and Managing a Business' started by TNSMachines, Oct 30, 2011.

  1. TNSMachines

    TNSMachines
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 30, 2011
    Messages:
    2
    Likes Received:
    0
    Hello,
    I've been a business owner for just over 20 years. I started my company in 1990. T&S Machines and Tools manufactures automotive and balancing equipment. We did very well in the 90's and after 2001 the automotive industry just hasn't been the same. Our best year we did $1.2m in revenue. Since 2001 we've had years where we only did about 400-500k.. I had to lay off all of my help and it took a lot just to keep the bills paid.

    My son graduated from college in August 2009 with a business degree. He is currently working full time with me rebuilding this business and going to school online to get his MBA. I would like to involve him in the business and let him take some ownership in it. I don't know what the best way to do this is. Right now the shares of the business are equally divided between my wife and I. I would like to try and find a way so that my son, wife and I can each hold 1/3 of the shares each. I feel like that would give my son more incentive to help build up the company and together we can really make this thing work again. Can someone help me with ideas of how to split up the business now? We would like to divide it up before we are really talking about a large deal of money. Things are small and simple now and I feel it would be easiest to do it now rather than later assuming we are able to grow the business into something substantial. Simply giving him a number of shares he will have to pay taxes on, which he can't afford. Should we start a new partnership and dissolve the old one? Will he have to purchase the shares to make this doable?

    Thank you.

    Tim
     
  2. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Greetings, Tim.

    I think that, barring some unusual facts not mentioned, you'd be able to transfer shares to your son via gift, in which case he'd have no income tax liability on the value of the transferred shares. The other side of that coin is, of course, that you receive no compensation for the transferred shares. It's a unilateral transfer of value, as is any gift.

    Alternatively, IF your company is structured as a partnership or LLC, you could have the company create a second class of equity---one which is entitled solely to some percentage of future profits, and which is NOT entitled to an immediate share of the existing assets---and generally, the company could issue this "future-profits-only" equity to your son without a current tax obligation on his part. He would only be taxed in future periods when and as the company earned taxable income.

    A third option is to have the company issue to your son a more traditional type of equity, one which is entitled to some share of the existing assets, as well as a % of the profits; i.e., a form of equity the terms of which match that of the equity held by your wife and yourself. The downside is that such transfers of equity are considered to be taxable income to your son when and as they occur. To allow for this, you could consider dribbling the equity out to him piecemeal, such that he gradually builds up his ownership percentage until the target level is reached, and such that his tax bite in any one year is less onerous.

    However, be aware that there are many details which are, as they say, beyond the scope of this informal chat between a couple of laymen. For example, in the gifting of shares I mentioned first, there might be estate and/or gift tax angles to be considered. As another example, there are circumstances in which even the more traditional type of equity won't create a tax liability to your son upon its initial issuance, but only if certain and very specific "risks of forfeiture" are placed upon the equity. These "restricted stock" transfers can be pretty cool, but they're also kinda tricky to blueprint.

    Point is, it'd be an excellent idea to discuss this with either your tax advisor or an attorney (assuming that said advisor has expertise in this area) in order to square up the specifics. The takeaway of this brief overview is simply that you probably do have multiple options for achieving your objectives here.

    Best of luck with it, Tim!
     
  3. TNSMachines

    TNSMachines
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 30, 2011
    Messages:
    2
    Likes Received:
    0
    The company is structured as a C-corp. I set it up myself in 1990. I have no idea what the actual value of the company would be at this point. I guess I could have it valuated but I'm not sure that would really help anything.
     
  4. LFinkle

    LFinkle
    uix_expand uix_collapse
    New Member

    Joined:
    Sep 26, 2011
    Messages:
    15
    Likes Received:
    2
    Tim, It sounds like what you want is to take on your son as a partner with you and your wife so you each own 1/3 of the business. I'm not sensing that the tax liability issue is the primarly concern but how to structure the stock options/partnership agreement. Assuming I am correct a couple of thoughts come to mind.

    1. An attorney can create a simple/straight forward stock holders agreement for not too much money. If you have one in place now for you and your wife then the new one would indicate the transfer of 25% of each of your stock to your son. If you don't have one in place than the new agreement would state that you each hold 1/3 of the stock. This means that when there are profits each of you is entitled to 1/3 of the profits being paid out.
    2. I am working with a situation now where there 2 partners, each 50% owners and one wants to buy 45% of the other's stock making him a 95% owner. The attorney created an agreement outlining the terms of this which in this case included a cash payment, though it sound like in your case you want to give him the stock outright without a cash component attached.
    3. Long-term remember if the business takes off he will have the right to sell his shares. You might want to include in the share holders agreement something that limits his ability to sell his shares to someone outside of you or your wife for instance. Right now it's meaningless but if the company really takes off it won't be so meaningless.

    This is a great topic for a product I am creating. Submit your questions and ideas to incedogroup.com/market-research. You'll be entered into a drawing to win the product.
     
  5. Aun

    Aun
    uix_expand uix_collapse
    Member

    Joined:
    Jun 18, 2011
    Messages:
    45
    Likes Received:
    10
    Hello Tim,
    I did MBA with specialization in Finance I am not a tax consultant. However by reading your lines I would like to suggest that take your son on payroll of your company and increase his salary by the number of 1/3 shares and break down his salary in (a)basic,(b)house rent,(c) medical,(d) utility bills, and (e) incentives. Make 1/3 of shares payment equivalent under incentives break down as incentives are not subject to tax in many countries and this can be done with mutual understanding between you , your wife and your son without transferring the ownership of the shares just raise his pay. Secondly to dissolve the partnership you have to look into your partnership deed clauses, how to dissolve the said partnership properly there must be a detailed clause(s) in writing in your (you+your wife) partnership deed stating how to dissolve this. Third if purchases the shares then the matter of paying taxes with him remains the same so increase his salary and make that 1/3 shares payment in that breakdown which one is not liable to tax in your country.

    Salary is an expense under administration expenses head and shares profit comes after deducting expenses and taxes; got my point?.

    Fourth; for you Mr Tim you said you have been paying bills rather making profits after 2001 for this you should consult with tax lawyer he would be very helpful for in you matter of paying just the taxes. I believe you have been paying taxes already to the government on many of the utilities you are using to run your business take those payments and show them in your financials under tax paid head (Deductible) clearly the tax lawyer will be helpful for you in your matter.

    Fifth; ask your consultant for the purchase of a company which has been showing loss in financials for three consecutive years and by purchasing such a company do the owner(s) would be having any tax benefit from the government? for how many years?
     

Share This Page