Here’s why you should consider making charitable giving part of any business exit plan.
Business owners are looking for different and innovative ways to give. One of those ways includes mixing charitable giving with their business exit plan, which can include selling business or private stock.
Entrepreneurs are leading the way in virtually every area of generosity. They give 50% more to charity than non-entrepreneurs, according to a study by Fidelity Charitable. The study also states that 69% of entrepreneurs say they want to incorporate charitable giving into their exit plans, and nearly 75% have had a discussion about philanthropy with an advisor.
The best time for business owners to maximize their gift is usually at the time of sale or transfer of a business. These are most likely the largest taxable events in a business owner’s lifetime.
A sale can generate a great deal of taxable income and/or capital gains taxes. A transfer to family members can generate significant gift and/or estate taxes. The tax benefits of giving aren’t the reason behind the gift, but can make it an ideal time to make a transformational contribution to nonprofit organizations.
What are the tax benefits of making a gift in conjunction with a business transition?
One of the most efficient ways to reduce the tax is by donating part of the business prior to the sale. At the Saint Paul & Minnesota Foundation, we work with donors and their advisors to help them donate a portion of the business to us. Then, we and the business owner will jointly sell the business to a buyer. This can be tricky, as you must avoid a prearranged sale.
A prearranged sale can potentially jeopardize tax savings, but if done properly it can go very smoothly. The donor gets a nice charitable income tax deduction that offsets the tax on the portion of the business sold directly. The Foundation can then sell a highly valuable asset.
Owners who would like to support multiple organizations can contribute the stock to a donor advised fund (DAF) at the Foundation. The Foundation sells the stock, and the sales proceeds are then available to grant to all the donor’s favorite nonprofits.
Donating stock to multiple organizations, while coordinating a sale of that stock, can be extremely complicated. A DAF is uniquely positioned to streamline that process. Our staff will work with donors and their advisors to open and manage their fund.
Transitioning a Business to the Next Generation
Another creative strategy is to use charitable giving as a way to transition a business to the next generation. This can help reduce the number of outstanding shares.
For example, say a business owner owns 75% of a business and her children own 25%. She wants to:
Exit the business
Generate some income
Increase her children’s share of the business
Her children don’t have the money to purchase as many shares as they want, so the business owner donates a third of her shares and gives a third to her children. The company makes an offer to purchase outstanding shares from the nonprofit, the business owner, and her children (this is often called a “charitable stock bailout’).
The nonprofit and the business owner want to sell, but her children don’t. The company can purchase all the shares the nonprofit and the business owner owns, and those shares are “retired” or absorbed back into the company. That automatically increases the children’s overall ownership interest to 100%.
These are just some of the creative ways that entrepreneurs can give. The Foundation is here to help entrepreneurs, business owners and their advisors craft giving plans that fit their own unique situations and businesses.
If you are a business owner contemplating a future sale of your business or a professional advisor working with a client who is considering a sale, please contact one of our gift planners to learn how we can help you maximize your giving options.
For additional helpful information and insights, download our Guide to Enhancing Your Business Transition with Charitable Giving.
The Saint Paul & Minnesota Foundation does not provide tax, legal or accounting advice. Please consult your own tax, legal and accounting advisors regarding your individual situation before engaging in any transaction.
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