Pieces of the pie – Dividing the family business into separate entities can benefit all
Abstract: If a small family business has become big, it may be time to split it into two or more entities. Doing so may be necessary if the company has evolved into two distinct businesses or if heirs are locked in a battle of clashing visions for its future. But before moving forward, it’s important to know how the split will affect tax liability. A split can be a tax-free transaction if the company provides a valid business reason that led to the division. But such splits are complex, especially if they involve an employee stock ownership plan (ESOP). It will first be necessary to check whether a split is allowed under a previous buy-sell agreement. It’s also important to focus on the previous and anticipated business structures and the company’s pre-split tax attributes, along with the impact of a split on personal finances.