Business succession planning involves identifying parties who can take over operating a company and making arrangements for them to do so. Effective business succession planning requires careful consideration of who has the capacity to run a business, as well as how to transition them into an ownership or leadership position within the company.
The focus on identifying candidates and ensuring they have proper training may result in business owners making relatively costly mistakes. Tax issues are a key consideration when establishing a business succession plan. There could be a variety of taxes that people must pay when transferring a business.
Income taxes on asset transfers, gift taxes and estate taxes all require consideration. Proper planning can help business owners and their successors minimize the tax obligations that come with a transition of ownership.
How does a transfer affect tax obligations?
People intending to pass business ownership to a child, grandchild or employee might make a gift of a partial ownership interest to their successor. However, doing that can trigger gift taxes owed by the party making the gift. As of 2025, any gift worth more than $19,000 could trigger gift taxes. While gifting ownership interests can reduce the likelihood of estate taxes after an owner passes, the gifted value can influence estate tax exemptions later.
Selling a business or transferring ownership to another person can also trigger income taxes. The exact amount of taxes due depends on how the owner holds the company and the way that they transfer their interest. Additionally, there are state-level taxes, including asset sales and use taxes that could apply depending on the assets involved. There could also be a real estate transfer tax and state-level income tax to cover.
How can owners minimize taxes?
Business owners may use a family limited partnership, a trust or a buy-sell agreement as a means of minimizing the tax obligations that accompany an ownership transfer. The sooner business owners begin preparing, the easier it is to make use of tax exemptions.
They can make strategic annual gifts that limit gift tax risk. Frequently, business owners need the insight of legal professionals who understand Massachusetts and federal tax laws to create succession plans that minimize transfer-related taxes. Business owners also need to be ready to review and update their succession plans whenever state or federal tax rules change.
Taking prompt action to establish a business succession plan and keep it up to date can help reduce the tax implications of transitioning out of an ownership position. Business owners can protect the businesses they run and their personal legacies with careful advance planning.