If you own a small business, you have probably given a significant amount of consideration to what you wish to happen to the business upon your death. If the business has been successful, you also likely have a considerable financial interest in the business. Without careful planning, the value of your financial interest in the business can be subject to either gift or estate taxes upon your death. Although there are numerous options that may be used to help reduce estate or gift taxes, the following are among the most commonly recommended by Atlanta estate planning attorneys:

• Sale of Your Business: Whether to a family member or third party, selling your business can avoid both estate and gift taxes if the sale is completed before, or at the time of, your death, and the sale is for the fair market value of the business. Note, however, that the sale could be subject to capital gains taxes.
• Trusts: You may choose to create an irrevocable trust in the form of a grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT) for your business. When using a GRAT or GRUT, you transfer your business assets into the trust and then receive an annual annuity from the trust for the life of the trust. At the trust termination, the remaining assets pass to the beneficiaries, but they pass at a decreased valuation, which results in a decrease in your tax liability.
• Forming a Family Partnership: By forming a partnership with family members, you can retain the general partner interests, and the day to day control of the business, while slowly gifting the limited partner interests to your family members. The interest you gift may qualify for valuation discounts for minority interest — again, limiting your tax exposure.

Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.

If you are a Fayette county small business owner, you may have heard the term “buy-sell agreement” used before but are not familiar with precisely how one is used or why you might want to consider entering into one. At its most basic, a buy-sell agreement is a legal agreement whereby you agree to sell your interest in a small business to someone upon the occurrence of a specific event, such as your death or incapacity.

Buy-sell agreements are most often used by partners in a business or by shareholders of a closely held corporation. The purpose is to erase the uncertainty that frequently follows upon the sudden incapacity or death of a partner or shareholder. In the absence of a buy-sell agreement, your interest in the business would likely end up in a court awaiting a judge’s decision how to handle the matter. By executing a buy-sell agreement, both you and the business know what will happen in the event of your incapacity or unexpected death.

Although each buy-sell agreement is unique to the business and parties entering into the agreement, there are similarities. The terms of the agreement typically dictate a pre-determined value for your interest in the business or a mechanism for determining the current fair market value of your interest. You then agree to sell your interest to someone, generally another partner, shareholder, or the business itself, upon the occurrence of a specific event such as your incapacity or death. The buyer is then legally bound to purchase your interest if the event comes to pass.

Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.

Leaving behind a share in a small businesses is not like passing along stocks in a publicly held company that can easily be sold in the blink of an eye. If you simply leave your share in hands of your family members, you are leaving your partners in a vulnerable position. Your heirs may want to be involved in the day-to-day operation of the business and your partners may not feel comfortable with this arrangement.

Another possibility is that your family could sell your share in the business to whoever came along making the largest offer. This individual or entity may not have the best interests of your partners in mind. And of course, if your partner or partners predecease you, you will be the party who would have concerns.

Small business succession challenges are usually handled through the execution of buy-sell agreements. With a cross purchase plan, each co-owner purchases an insurance policy on each other. Upon the death of one of the partners, the combined insurance policy proceeds are used to buy that partner’s share in the business from his or her estate. The entity plan is also commonly utilized. With this approach the business entity itself takes out life insurance on all of the partners. Should one of the partners pass away, the insurance benefits are used to buy that individual’s share in the business from his or her family in accordance with the terms that agreed to by all the partners.

Clearly small-business owners must be proactive about addressing the intricacies involved in arranging for an exit strategy that is fair and equitable to all parties involved. The best way to explore all of your options and ultimately take action is with the assistance of an experienced estate planning attorney who has a background assisting small business owners.

Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.

If you are reading this because you have developed an interest in planning your estate, you may have reached the point where you recognize the value of advance planning. Atlanta residents should indeed have an estate plan in place, and it should ideally be revisited regularly as time goes on and your life situation evolves. However, when you are in business for yourself an added layer of planning is necessary, and depending upon the way that you envision your legacy, your future intentions should impact your present decisions when you are running your business.

There are some very interesting statistics surrounding family owned businesses that are worth considering. Perhaps surprisingly, almost nine out of ten businesses in the United States are family owned, and around 35% of the Fortune 500 companies are family owned. Yet, less than a third of family run businesses survive into second generation, and only 15% of them make it to the third. This is rather startling, and for the most part this pattern exists due to a lack of planning.

If you want to pass your business on to the next generation, you need to identify the family member or members that are best suited for particular roles and make clear plans for them. A lack of communication is one of the hindrances, and talking about a future when the founder is not around may be an uncomfortable topic for some. But these conversations are necessary to keep the enterprise alive generation to generation. This type of open and intelligent communication is part of the estate planning process where small businesses are concerned. Once future roles have been assigned and accepted, each day should be part of the learning process that prepares the next generation to handle the business.

There is no greater gift that one can give to their loved ones than the ongoing ability to earn a living while building on a business with a solid foundation. If you plan ahead properly, identify your successors and proceed in a communicative manner your business can be kept in the family for a long, long time.

Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.

As an owner of a small business, you’re allowed to deduct the cost of doing business from your gross income. What you get after this deduction is your net business profit. You have to pay tax on your net business profit.

If you know how to maximize your business expenses, you’ll be able to reduce your income tax, putting more money in your pocket. Guidance from a tax professional can help you understand the tax laws and how best to structure your balance sheet. You can even follow tax rules and actually get yourself a personal benefit like a holiday or retirement savings plan! It all depends on how you manage your deductions.

There’s no specific limit on the amount of operating expenses you can claim. Expenses have to be reasonable, but usually the IRS doesn’t question the amount of individual expenses you claim, because people are unlikely to pay more for something than it’s worth. However, you’ll need to be able to prove that you actually paid for each business expense that you claim. Good recordkeeping is key; you’ll need to keep your receipts and be able to track your payments for any expenses you’ve claimed.

When claiming expenses, it’s important to know the difference between personal and business expenses. For example, you cannot deduct expenses incurred you use for commuting to work. That is purely a personal expense. The same is true for meals you buy for yourself while you’re working. Although you can deduct the expense of meals you buy for clients, your tab for your own meal is considered personal.

Another type of expense that may raise a red flag with the IRS is payments you make to family members who have another business or large payments to a company in which your relative has an ownership interest. Here again, documentation and knowing the rules are key. For help with these or other small business tax issues, contact a tax professional.

Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.