In the event of a generational succession of a family-owned company, the primary wish is that the family should continue owning the company. There can be many benefits for both the business owner and his children by carefully planning the transfer of a business to the next generation, which can, i.e. be done by an ongoing, successive transfer.
The owner’s desire might also be for others than family members to continue the business. We are increasingly experiencing that trusted employees or close friends replace the company’s owner.
However, no matter who is going to replace the owner, the new owner must live up to both professional and managerial requirements for a succession to be successful. A generational succession often involves more actors and requires several personal considerations. Among other things, decisions need to be made regarding the method and time of the transfer.
Choice of ownership structure
In connection with a generational succession, it is essential to make sure that the company’s structure suits the new ownership and change it if necessary. When transferring to a new generation, it will often be advantageous to set up a holding company, which is positioned between the company (the operating company) and the transferor. The advantage of this structure is that the holding company can be set up according to the rules on tax-free share exchange. Thus, the transfer avoids being taxed. By establishing holding companies, it will also be possible to avoid issues related the “money tank rule”, according to which a generational succession cannot be made upon the shareholder’s death. In other cases, you can advantageously make a demerger of the company, thereby splitting the company’s assets and obligations up and placing them in several new companies.
When the company is to be transferred, you must choose the correct transfer method. A transfer can, i.e. happen by gift, through a will, succession, or the ordinary sale of shares. With a gift transfer, the transfer occurs in the form of a gift disposition. This means that regular income tax must be paid, unless the transferee is a close family member. In that case, you have to pay a reduced gift tax. If you choose to apply the succession rules, the new owner takes over the previous owner’s tax obligations. In this way, the tax payment is deferred. A generational change can also occur according to the so-called A/B model, which means that the company’s capital is divided into A and B shares where the A shares are granted a right to a specified advance dividend.
Tax and fiscal matters
Payment of taxes and gift and inheritance taxes can be a tremendous financial burden connected with a generational succession. It can also have a significant impact on the company’s continued operation. In many cases, it is possible to avoid paying a tax immediately upon completing the transfer, but this is not always the most optimal solution. The best solution depends on the specific situation, and the choice of transfer method plays a significant role. At Advokatgruppen, we also help with the tax related challenges of generational succession.
When should the transfer take place?
If you face a future generational succession, there are several benefits to seeking advise at an early stage. It is possible to obtain many economic benefits. It also gives you and your adviser better time for planning, so that together we can make a plan based on your specific wishes and needs. At Advokatgruppen, we are ready to help you, whether it is a continuation within the family you seek or if the company is to be transferred to another party.
Be aware… You can advantageously have a pre-emptive power of attorney drawn up, if you want to secure your company if something should happen to you.
Do you need competent lawyers?
It is crucial to choose the best ownership structure and transfer method when dealing with a generational succession. Likewise, the process is associated with complex tax rules. It is, therefore, an advantage to be allied with a competent and experienced team of lawyers. At Advokatgruppen, we specialize in company law and generational succession. You are more than welcome to contact us for a no-obligation conversation.