Setting up a business is an exciting, if sometimes scary, time. An idea or gap in the market turns into an opportunity that leads to a fully-fledged business which takes on its own life and flourishes.
But what happens if things change? Business owners/family members may fall out, no longer see eye to eye, or want to go their own way. How should the business move forward?
These are just some of the alternatives. Which route is eventually taken will depend on the stage of the business, the age of the owners, future succession (whether in or outside of the family) and, to some extent, taxation.
For example, a family member or owner no longer wishing to be involved in the business could step down as a director or employee and simply seek their return as a shareholder. This would enable continuity for those wishing to run the business, but at the cost of having a shareholder not playing an active part in the business.
If the business founder is seeking an income stream in retirement in return for their hard work, this may be a practical solution. In some cases, it may make sense to smooth the way for a full exit through a share buyback or family management buyout which falls under the Capital Gains Tax rules. This reduces the tax rate from up to 39.75% to as little as 10%. Such a course of action would likely form part of a wider Inheritance Tax planning exercise given assets that qualify for 100% relief could be replaced by cash which is chargeable at up to 40%.
If things are more fraught, it may be necessary to break up the business. Although tax legislation allows for a tax-free business break up, the statutory rules can be quite restrictive. Any future changes in ownership would turn a tax-free dividend of exiting the business into one that is taxed at income tax rates.
A more common approach, such as a share capital reduction or liquidation demerger, may be necessary to turn business A into business B and C. While these routes are well tested and give more flexibility to shareholders, once the split has been achieved they are complicated. Careful advice is needed to get the steps right and avoid nasty tax surprises.
Finally, a sale or cessation of the business may be the way to go forward. This could be a third party sale, liquidation, or a disposal of the business to an Employee Ownership Trust, a potentially tax free way to pass on a controlling interest to continuing employees.
Most family business owners would prefer a business to continue and work through their problems – but it is always good to know your options.
To discuss your particular challenges and the possible solutions available, please speak to Nick Latimer or your usual Crowe contact