You have worked hard to build your business. As you approach retirement, or the need to leave your business for other reasons, you should have a plan in place to wind up your business. There are several different types of exit strategies. Which one is right for you depends on factors like your customers, finances, your family, and your employees.
The most obvious strategy is simply to close down the business. When you close down the business you must be certain to properly wind down the business' affairs. Just because you have decided to leave the business does not mean that the business' responsibilities and obligations immediately cease. Final taxes must be filed and paid. Outstanding vendors must be paid. There should be a filing with the Secretary of State indicating that the business has been closed. Failure to properly wind down the business may expose you individually. For example, if the business has any unpaid debts, its assets should be used to satisfy those debts. If you take the assets without paying the debts, you may be risking future creditor's efforts against you personally to recoup those assets.
Another exist strategy is to sell the business. Someone from inside or outside the business takes over the day-to-day operation of the business, while you are released from the business. In selling a business, the challenge is deciding on a sale price and the terms for payment. You must negotiate with the buyer to determine the price. Then the buyer must be able to buy the business. He may do this by paying cash, taking a loan from a bank, taking a loan from you, or a structured payment plan over time based on the company's profits. The terms of a buy-sell agreement, and how the money is paid, are as various and negotiable as you want to make them. However, they should be clearly defined in a written agreement so that no one is surprised and to protect all the parties in the future. You want to be certain that in selling your business, you do not end up fighting later about getting paid.
You may also choose to exit the business by giving ownership to a family member. Again, the business continues but you are released from managing it. For example, this is where a father hands the business down to his sons. This may include a buy-sell agreement, like that discussed above. Many times, the owner chooses to gift the business to his child or children. When this is done, it may create a federally taxable gift. You must have the business valued to determine whether any gift taxes are required, and then claim the transfer on a proper tax return.
This year, 2012, offers a unique opportunity to make such a gift. During this year, you can give up to $5 million; next year, it is only $1 million. That is a difference of $4 million. It is a use-it-or-lose it situation. If you are considering giving your business to your family, then the next few months offers us a unique opportunity to give the business to your family without having to pay gift or estate taxes on a significant asset.
As you can see, there are specific financial, tax, and legal consequences to any decision to exit your business. Whether you just close the doors, sell the business, or choose to gift it to someone, there are consequences and processes that should be followed to ensure compliance with the law, protect all involved, and minimize fees, costs, and liabilities.