Not so fast! Considerations for Giving Family Shares in your Business

As a small business owner, you may be considering giving shares of your company to a family member. This can be a generous and thoughtful gesture, but it's important to be aware of the potential tax implications. In this blog post, we'll explore some of the key tax issues that can arise when giving shares of a small business to a family member, as well as some of the other business considerations you should keep in mind.

First, let's address the issue of tax reporting. When you give shares of your business to a family member, the Internal Revenue Service (IRS) considers this a transfer of property. As such, you may be required to report the transaction on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This form is used to report gifts and transfers of property that exceed the annual exclusion amount, which is currently $15,000 per recipient. If the value of the shares you are giving to your family member exceeds this amount, you may be required to file Form 709 and pay gift tax.

However, there are some exceptions to this rule. For example, if you are giving the shares to your spouse, you may be able to take advantage of the unlimited marital deduction. This means that you can transfer any amount of property to your spouse without incurring gift tax. Similarly, if you are giving the shares to a charitable organization, you may be able to claim a charitable deduction on your tax return.

In addition to tax reporting issues, there are also a number of planning issues to consider when giving shares of your small business to a family member. For example, you may want to consider the impact of the gift on your own estate plan. If you are giving a significant portion of your business to a family member, this could impact your ability to control the business and make decisions about its future direction. You may want to consult with an estate planning attorney to ensure that your gifting strategy is aligned with your overall estate plan.

Another important consideration is the tax consequences of turning your sole proprietorship into a partnership. If you are the sole owner of your small business, you may be taxed on your business income as a sole proprietor. However, if you give shares of your business to a family member, you may be creating a partnership for tax purposes. This can have significant tax implications, as partnerships are taxed differently than sole proprietorships.

In general, partnerships are required to file an annual tax return (Form 1065) and pay taxes on their business income. However, each partner is also required to report their share of the partnership's income, credits, and deductions on their individual tax return (Form 1040). This means that if you give shares of your business to a family member, you may be required to file additional tax returns and pay additional taxes.

In addition to tax implications, there are also other business considerations to keep in mind when giving shares of your small business to a family member. For example, you may want to consider the impact on your relationship with your family member. Giving away a portion of your business can be a major gesture, and it's important to ensure that you are both on the same page about the expectations and responsibilities associated with the gift. You may also want to consider the impact on your business operations. If you are giving a significant portion of your business to a family member, you may need to reassess your management structure and make changes to ensure that the business continues to run smoothly.

Finally, it's important to be aware of any legal requirements or restrictions that may apply when giving shares of your small business to a family member. For example, you may need to file documents with your state's business registry or obtain the consent of other shareholders. It's also a good idea to consult with a lawyer to ensure that your gift is properly documented and that you are complying with all relevant laws and regulations.

In summary, giving shares of your small business to a family member can have significant tax and business implications. It's important to be aware of these issues and to carefully consider the potential consequences before making a decision. By seeking the advice of a tax professional and a lawyer, you can ensure that your gifting strategy is well-planned and that you are complying with all relevant laws and regulations. Overall, while giving shares of your small business to a family member can be a generous and thoughtful gesture, it's important to be mindful of the potential tax and business considerations, and to carefully plan and execute the gift to ensure that it is successful and beneficial for all parties involved.