Are you a partner in a small business partnership thinking of exiting or retiring in the next few years? If so, you’ve come to the right place. If you’re looking for family small business succession planning tips you can find it here.
What is Succession Planning?
Succession planning involves identifying your future replacement(s), negotiating a price, and establishing a transition timeline, among other details. Succession planning matters if you care about the small business you built and want it to flourish without you.
A succession plan is like a will. You know your business better than anyone, and you can identify who could do your job as well or better. Your primary goal is the successful continuation of your business, as well as receiving full compensation on the sale. Failing to plan, and then rushing a sale to an unqualified buyer, can lead to your business failing and never receiving your full payout. It’s also rare that the existing owner can simply walk away upon the sale. A successful transition almost always involves a period of time working as an employee or consultant for the new owner in order to maintain client relationships, address unexpected issues, and assist in operations.
What makes Business Partnerships Unique?
Partnerships are unique in their ownership and tax structure. Unlike sole proprietorships or certain S-Corps, Partnerships must have 2 or more partners – there is no sole ownership. This means designating a successor or selling your partnership stake needs to be agreed by the other partner(s), assuming the initial partnership agreements include such stipulations. This may not seem like an issue, but it can quickly become contentious and ruin relationships.
Think about it: you went into business with your partner(s) because you each brought something to the table. Your successor also needs to bring something to the table. Most agreements give the other partners rights with respect to the sale of any partnership interests. Succession planning aims to keep you out of a legal battle. You should identify your replacement years ahead of time, communicate with the other partner(s), and possibly establish buyback rights or other protections in the event the transition doesn’t go well or the new partner fails.
Partnerships are also taxed differently. Partners have income/loss percentages, capital percentages, guaranteed payments, distributions, and built-in gain/loss to consider, among other complications. There are also general vs. limited partner considerations. All of this can add up to a complicated reconciliation.
Succession Planning in a Partnership
Succession planning should begin 5 years before you want to step away. Consult the lawyer that wrote up the initial partnership agreement if the partners disagree on terms and conditions. Consult your accountant for a tax projection and inside/outside basis for gain/loss. Certain succession plans will involve a gradual buyout, and your accountant can help with this as well.
Consider partner spouses, children, and family members. Do they work in the business, have any rights due to their relationship with the partners, and agree or disagree with this transition? Perhaps a partner has a child working in the business that they hope will succeed them, but the other partner has no interest joining their fortunes with the child. How will this be resolved without the partnership dissolving? Dissolving or reclassifying a partnership to a different entity may also be options to explore.
Lastly, consider managing partner or partnership representative responsibilities, and who they will transfer to. This will affect decision making as well as technical aspects like the centralized partnership audit regime. There may be a power struggle amongst the remaining partners if you don’t.
The creation of a succession plan is the first step, but you must continue to review it and adjust accordingly. The last thing you want is years of planning wasted when you, your partner(s), or your chosen successor change their minds or pass away.
Working with Haworth & Company, Ltd.
We’ve worked with small business partnerships for over 30 years, so we know how complex they are, and how messy transitions can be. When you work with us you’ll receive advise based on experience and the latest law changes, as well as a private, professional third-party to help with any succession or transition issues. We can be the stability your partnership needs in an unprecedented period by continuing to make your payroll, accounting, and taxes go smoothly. If you’re thinking about the future, or want to get all of those services under one roof, please contact us today.