September - 2017
There is a great deal for Ellen to consider here. Ranging from the most suitable future structure and the level of control Ellen wishes to retain; to how and when to pass on the business to the next generation. Key to this will be retaining the ability to treat the whole family fairly.
At the moment, Ellen is a sole trader. This has the advantage of being a very simple structure. However, it has a number of drawbacks. Firstly, Ellen is exposed to unlimited liability should anything go wrong. If the business has financial difficulties, then Ellen's personal assets may be at risk from her creditors. If Ellen is considering handing over the day to day management of the business to Jude, this is a consideration. Secondly, if Ellen does wish to transfer ownership of the business in stages, then she cannot continue as a sole trader. Either she will need to incorporate the business or enter into a partnership with Jude. Thirdly, as a sole trader, the ways in which those who work in the business are rewarded are relatively limited. It may be that a corporate structure offers more flexibility than the current arrangement.
On balance, it may be that converting the business into a limited company may be the best way for Ellen to retain control, reward and incentivise Jude (and anyone else in the business) and carry out some succession planning. The first step is for us to have a meeting with Ellen to establish precisely what she hopes to achieve. It is clearly very important to ensure that whatever structure is put in place, sufficient flexibility is retained so that the business can be allowed to flourish. After that, the main considerations are:-
Retaining control in the short-term can be achieved by Ellen remaining a majority shareholder as well as Director of the company.
Ellen needs to decide if the shop premises should be included as part of the business or solely retained by Ellen. There are clear Inheritance Tax advantages if the premises are in the business, but in the long term, the property and its rental income may provide Ellen with a supplement to her pension income.
To transfer the business over time, it is possible to put in place an incentive scheme so that if Jude's efforts result in a growing business, he is able to benefit from that by receiving shares in the company. However there are tax compliance issues here.
In the longer term, consideration will need to be given to Ellen's succession planning. The good news is that the business is likely to be eligible for 100% Business Property Relief for Inheritance Tax purposes. In addition, the use of a corporate structure means that other members of the family might also share in the future growth of the business. Lifetime planning may involve the transfer of shares outright or into a trust. Of course, the use of a trust would allow for continued control. Ultimately, it will be essential for Ellen's Will to be reviewed to ensure that in future, control and ownership passes to those family members who are involved in the running of the business.
The key here is to balance the desire for Ellen to retain a close involvement in the business, while putting in place a structure that ensures flexibility in future and incentivising Jude for the benefit of all.