Successful entrepreneurs often view the family business as the crown jewel to their legacy for the next generation(s). As such, succession planning for the family business and preserving the family’s wealth is always a top priority and often encompasses tax and estate planning. Implementing a succession plan that will ensure the continuation of the family business while preserving the family’s wealth can be challenging for professional advisors who are assisting successful entrepreneurs.
For many professional advisors, tax and estate planning is often prioritized, for good reasons. For example, an estate freeze is frequently the “go-to strategy” as it is an established strategy recognized by the Canada Revenue Agency (that is, when implemented properly).
Although an estate freeze may provide a roadmap for a transfer to the second generation, it often fails to address future transitions to the third and fourth generations. This begs the question as to how entrepreneurs can plan for future generational transitions today. This can generally be addressed by implementing a corporation governance framework.
Governance of the Business
Professional advisors often overlook the importance of reviewing the governance of the family business. How are decisions made and what is the process for making such decisions? Focusing on implementing a corporate governance framework will establish a clear process and rules for making consequential business decisions for all future generations. Such framework should also address the rules and structure concerning the management of the family business and how to transition the wealth and the crown jewel (i.e., the business) to the next generation(s).
How should a successful family businesses establish a “family constitution” that governs the management and decision-making framework? The family constitution would address overlapping interests related to a family business, namely: (1) ownership; (2) day-to-day operations of the business; and (3) the family dynamics. The family constitution would aim for the long-term success of the family business while maintaining the family’s wealth and more importantly, preserving the family harmony.
Legal Framework Built for Long-Term Protection
The particular legal entity (e.g., a corporation or a partnership) dictates the legal framework that needs to be reviewed. A family may have business interests in different provinces and even different countries. In such cases, professional advisors must recognize the legal framework of each jurisdiction involved in the business structure to provide adequate advice to successful entrepreneurs and their family.
To ensure the long-term protection of the business structure for the future generation(s), it is imperative to navigate through the relevant tax treaties to consider all tax implications.
Conclusion
Successful entrepreneurs expect tax and estate advice from their professional advisors. This article aims to highlight other components of the family business succession plan that should also be reviewed. Ultimately, the success of the family business succession plan will depend on the family’s leadership, acceptance of changing the business culture (notably, control) and the willingness to adapt to new realities. This is where experienced professional advisors can truly make a difference.
