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Editor’s note: This is the first in a series of articles on the planning considerations and decisions that business owners face over the lifecycle of creating and running a company.
When starting a business, one of the most important things to consider is how it will end. Whether you’ll sell the business, step back and let your children or employees run it (or buy it from you), or just shut it down when you are tired of running it, thinking about the possibilities now will help you decide how to structure your business from the beginning.
And while it’s impossible to know for sure what you’ll eventually do with the business you’re starting today, considering these details at the outset should ensure smoother sailing if problems arise as the business evolves.
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1. What is the best way to structure and own your new business?
One of the first decisions to make is how to organize the business. There are several options, and without proper advice, some important considerations may be missed.
Organizing a business as a sole proprietorship, a corporation, a partnership, a limited liability company or an S corporation will have tax effects:
- Sole proprietorship. This is the simplest way to own a business, but it offers no liability protection, and the owner will be taxed on the business income and potential benefit from start-up losses.
- LLCs and limited partnerships. Offer liability protection with pass-through taxation and some flexibility over tax elections and potential benefit from start-up losses.
- C corporations. Offer liability protection, but profits must be taxed at the corporate level and again when distributed to owners.
- S corporations. Offer liability protection with pass-through taxation to avoid double taxation and potential benefit from start-up losses.
These tax effects will impact the operation of the business and, if the business is eventually sold, the way the sale will be treated from a tax perspective. It is therefore important to consider the possible outcomes associated with your choice of entity:
- What will your decisions do to your income tax liability — federal, state and local?
- Will an eventual sale of the business lead to capital gains tax treatment or ordinary income tax treatment?
- Will you have an entity-level income tax and a personal income tax liability from business earnings, and how will any losses be recognized?
- Are there approaches that provide tax advantages upon exit?
When a business is sold, the gain is often subject to tax. Depending on the structure of the business and of the sale, some may be taxed as capital gain and some may be taxed as ordinary income.
However, there are approaches to organizing the business at the outset that can mitigate the impact of these taxes.
One is organizing the business under the qualified opportunity zone rules, and another is organizing it so that it qualifies for the qualified small business stock exemption.
Both programs were enhanced or extended through the recent One Big Beautiful Bill Act (OBBBA), and if tax savings on sale is of interest, you should engage advisers to assess the viability in your particular situation.
There are planning techniques to minimize the taxes paid after the initial company setup, as well as before and even after the sale of a business, and some of those will be addressed in a future article in this series.
2. When starting a business with co-owners, how will you deal with conflict?
It is common for unrelated persons to start a business together. This makes sense for lots of reasons, not least of which are:
- No one person knows how to do everything
- Spreading ownership among multiple people means spreading the start-up and operating expenses of the business among them, thereby reducing the initial financial burden
However, sharing ownership with non-family members can also create complexities that you should consider at the outset of your journey. Thinking about possible conflicts before they occur often leads to a better outcome when conflict happens.
So, include provisions that address how you want to control and resolve conflicts.
For example, if the co-owner(s) of your business want to cash out at some point in the future, how do you want this to unfold?
Many business owners will include provisions that require the exiting owner to offer their ownership interest to the other owner(s) first, subject to a process that is contemplated in the governing agreement.
These provisions may include a methodology for valuing the ownership interest, payment provisions and permissible successor owners of that interest.
These provisions may also control how an owner may give their interest to others, and whether another has a first right of refusal if an owner wishes to give some of their interests away to family members, for example.
3. What are the tax benefits of transferring or gifting part of your business early on?
If you feel like the business will have significant value at some point — and after all, who doesn’t think this when you start a business? — you may wish to consider transferring some of the business ownership interest to trusts for the benefit of your spouse, children and/or grandchildren.
The reason for doing this early is that the business will likely be valued at the lowest amount when you start it. Why does this make a difference? When you give something away — to a trust or outright — there is a federal gift tax on the value of what you have given away.
Often, this does not require the donor to pay a tax for the gift because everyone is entitled to a certain amount they can give away to a non-spouse free of federal gift or estate tax (gifts to a spouse are typically exempt anyway).
This amount is often referred to as the “unified credit amount,” and, beginning in 2026, this amount is $15 million per person.
This means that you may give up to $15 million away during your lifetime before ever paying a federal gift tax, and if there is any unused unified credit amount at the time of your death, you may give the rest away after you die when property you own is passed by title, by operation of your last will and testament or by revocable trust, or by beneficiary designation.
4. When should you create a business succession plan?
Who should run the business when you no longer want to do so? Should those same persons own part of the business?
While it may be difficult to decide who will run your fledgling business when you eventually retire, this is worth considering as early as possible.
- Keep it in the family. If you believe your spouse, children and grandchildren will take over where you leave off, it may make sense to hold business ownership interests (or some of these interests) in a trust that benefits the entire family as a way to keep the business “in the family.”
- Outside ownership with family control. If you believe that you will transfer control of the business to unrelated persons and you still want your family to benefit financially when you are no longer in charge, you may want the operating agreement to include provisions that directly address who controls the business, irrespective of who owns the business.
- Selling the business to a third party. If you think you will eventually position the business for sale to a stranger, you may want to incorporate some provisions in the operating agreement that will permit gifts of discounted ownership interests to family members or a trust that benefits family members at the outset, thereby enabling discounted gifts to family, who will then share in the sales proceeds outside of the owner’s taxable estate.
Most of these decisions can be revisited and changed later, but thinking about the possibilities now may lead you to incorporate some thoughtful provisions into agreements that will benefit you and your family in the future.
5. What happens if an owner of the business dies or becomes disabled?
As uncomfortable as it may be to consider, what do the owners do if one of the co-owners dies or becomes disabled and unable to perform the duties they used to perform?
Lawyers, accountants and other advisers will tell you what they ordinarily see in these circumstances, but if you and your co-owners can imagine another solution, an attorney can draft for it.
The importance of these provisions cannot be underestimated. Although you are excited to go into business with your co-owner, would you feel the same way about operating the business with their spouse? How about their kids or a trustee of a trust for those kids?
Similar to the provisions that address the co-owner who wants to cash out while alive, provisions that address what happens when an owner dies should be contemplated as you begin to build a business.
You do not want the equity — financial and sweat equity — that you put into the business jeopardized by the untimely death of your partner. And frankly, your partner’s spouse may not want to work with you either.
As fun as it is to start a business, do not ignore the details. Left unaddressed, the details can create fissures in the business — or break it entirely.
Christopher F. Tate, J.D., Partner and Wealth Strategist at Fidelis Capital, has nearly 30 years of experience and specializes in wealth planning, advanced estate planning and cash-flow planning, delivering comprehensive strategies to Fidelis Capital’s UHNW families and institutions.
Rick Simonetti, Founding Partner, CEO and Head of Wealth Planning at Fidelis Capital, is a deeply experienced expert on integrating wealth planning, family dynamics and tax management into financial decisions and advice. His visionary leadership is guided by nearly 35 years of industry experience.
