Do you want to expand ownership of your family business? For most small, family-run corporations, growth beyond the original owner(s) is vital to its continuity and success. But adding owners can be a difficult process. You have several choices when it comes to offering ownership to others, and each method is best used in certain circumstances. To help you and your potential successors find the right path, here's what you should know about the three most common routes to a business transition.
1. Gifting Stock Shares
Ownership of a corporation (of any size) is done by means of stock interest. Most small businesses start out with one person who effectively owns 100% of the stock or a few owners who collectively own the full amount. You can add owners at any time by gifting them some of your existing shares. Money does not need to change hands in order for the stock to be legally transferred.
Gift shares are the easiest way to hand over the operation of your business to children or a spouse as a family activity. Some family businesses, for instance, gift shares to children who have worked as regular or informal employees to learn the business. Avoid gift tax issues by gifting shares in annual amounts underneath the IRS gift tax threshold.
2. Selling Stock Shares
You may also choose to sell stock shares. You would sign a contract with a buyer to transfer your stock with the state oversight agency in return for a specified amount of money per share. This could be your full amount, a part of your own shares, or even new shares issued for this purpose (thus diluting all existing interests).
Selling shares is most appropriate when the original owner retires and must recoup their investment in the business. It's also a good way to hand over the company to long-time employees. And of course, if you want to move the business outside the family, selling shares is how you attract outside investors.
3. Offering Stock Compensation
A third option is available when you want to pass on the business to someone who already works for it. This could be valued employees, a single key employee who will take over, or family members who are on payroll. By offering stock as part of their employee compensation package, you create a reward for good work and ensure that new owners have experience within the company.
Which route is the best way for you to expand the ownership of your small corporation? By choosing the option that best fits your goals and the person you want to take over, you can craft a smooth transition and know your company is in good hands. Learn more about gifting, selling, and paying by stock shares, or learn more about corporate law, by meeting with a local law firm.