If you’re considering selling your business, chances are this move will represent the culmination of your life’s work – especially if it’s a family business. After giving so much of yourself to it, the idea of selling a business gives many small business owners pause as they look for opportunities for an even more meaningful transfer: a sale that allows them to harness an opportunity to achieve philanthropic goals, as well.
With a bit of intentional business planning and savvy tax strategy, the sale of your business can help you meet your charitable giving goals. Below, we’ll review three case studies based on real business owners that illustrate potential opportunities to monetize your business while also making meaningful charitable contributions.
Case Study #1: The Architect and the Family Foundation
Gina was a successful architect who, after years of making a name for herself at various well-known firms, opened her own architectural firm. Established as an S Corp, of which she was the sole stockholder, she operated successfully for several years before being presented with an offer that was simply too good to refuse. Gina was able to sell her firm to a publicly-traded real estate investment trust (REIT), and the sale was structured as a tax-free reorganization. In exchange for 100 percent of the stock of her S Corp, Gina received the stock of the REIT. Gina agreed to a lock-up period of just six months, after which time she was free to sell or gift the REIT stock.
Pursuant to this transaction, Gina consulted with her tax advisor and decided to contribute the REIT stock to her family foundation. The stock qualified as a long-term capital gain because the holding period for the REIT stock was tacked onto the holding period for the S Corp stock.
In addition to the opportunity to gift the REIT stock, Gina also took advantage of the fact that her S Corp stock was converted into publicly-traded stock tax-free. This meant that, when she contributed the stock to her family foundation, she received a charitable contribution deduction for the amount equal to the fair market value of the stock, rather than a value limited to the stock’s adjusted basis.
SEE ALSO: Wanting to Make an Impact with Charitable Giving?
Case Study #2: A Perfectly Timed Sale
RJ considered himself a serial entrepreneur, but he had settled comfortably into developing and operating for-profit colleges in recent years, done through a privately held corporation. He was surprised to receive an all-cash offer to sell to another company in the for-profit college sector and, while he was excited by the opportunity, it also presented him with a dilemma. Should he sell the stock of his corporation to the buyer and make a cash contribution to his newly formed family foundation, or should he contribute stock to the foundation before the sale took place?
A consultation with his tax advisor showed RJ that selling the stock first and making a cash gift to the family foundation afterward was the better choice in two ways. Firstly, from a business standpoint, contributing privately held stock would have allowed RJ to claim a charitable contribution deduction only equal to his adjusted basis in the stock – not the fair market value. Secondly, from the foundation’s standpoint, it would have to sell most of the stock within 60 months in order to remain within excess business holdings limits and avoid a violation. For these two reasons, RJ and his tax professional agreed that it would be optimal to sell the stock and then make a cash gift to his foundation.
SEE ALSO: Charitable Gifting Strategies
Case Study #3: Estate Planning
Douglas had made his life’s work building and purchasing commercial office space for investment purposes, and he was co-founder and 50 percent owner of a limited partnership to carry out this work. His business partner – a long-time friend who was unrelated to Douglas – owned the other 50 percent of the partnership.
In his estate plan, Douglas made a bequest of 30 percent profits interest in the limited partnership to his family foundation, with the balance going to his children and grandchildren after his death. Since his estate received a step-up in basis upon his passing, his estate would be eligible to obtain an estate tax deduction for the fair market value of the partnership interest. Additionally, since more than 95 percent of the partnership’s earnings came from rent payments from real property, the family foundation could retain ownership of the partnership interest under private foundation excess business holdings rules. The foundation wasn’t permitted to sell its partnership interest to Douglas’ family members due to IRS prohibitions, but it could always choose to sell to an unrelated third party or have the partnership redeem its interest.
Final Thoughts on Selling a Business and Achieving Philanthropic Goals
As the three case studies above illustrate, every business sale is different and will present its own unique philanthropic opportunities. Whether you founded your business or inherited it, a sale or merger represents a turning point in your career – and in your life. If you’d like to, it’s usually possible to monetize the business while also making a charitable transaction, too. Just remember to consult a professional regarding proper tax planning, pay attention to timing, and engage in thoughtful business planning prior to executing the transaction.