Taxes are a crucial aspect of any business, and family-run businesses are no exception. While these enterprises often thrive on shared values, trust, and collaboration, they face unique tax challenges, from profit allocation to succession planning. Understanding and managing these intricacies is vital to ensure compliance and secure long-term stability.

At Holbrook & Manter, we believe in empowering family businesses by providing the expertise and personalized service they need to flourish. We have had the honor of sharing these and many other tax tips with family businesses for well over 100 years:

Why Taxes Are Different for Family Businesses

Running a family business introduces complexities that extend beyond day-to-day operations. Taxes often require special attention because of factors like shared ownership, familial employment, and long-term succession planning goals. Key areas to consider include:

• Profit Allocation: Ensuring fair and transparent distribution among family members.

• Family Employment: Managing payroll taxes and confirming reasonable compensation to family employees.

• Succession Planning: Navigating estate taxes and planning the efficient transfer of ownership to the next generation.

These nuances make proactive tax planning an essential tool for family businesses.

Key Tax Considerations

1. Business Structure

Selecting the right structure—whether it’s a sole proprietorship, partnership, LLC, or corporation—directly impacts how your business is taxed. For example, an LLC can offer flexibility in profit distribution, while a corporation may provide opportunities for tax deferrals or deductions.

If you’re wondering whether your current structure is optimal for your tax strategy, this is an area where our team specializes in conducting detailed, personalized reviews.

2. Payroll and Compensation

When family members are employees, establishing clear payroll policies is essential. This includes paying realistic salaries and adhering to payroll tax requirements. Overcompensating family members can raise IRS scrutiny, while undercompensation can lead to tax inefficiencies.

Additionally, employing family members under age 18 in certain roles may offer tax advantages by avoiding specific federal payroll taxes.

3. Tax Deductions and Credits

Family businesses can often benefit from deductions and credits tailored to their unique operations. Some examples include:

• Home offices used for the business.

• Family employee salaries.

• Retirement benefits for family workers.

• Research & Development Tax Credits, if applicable to your business.

An experienced advisor can help identify opportunities to maximize deductions while ensuring compliance.

4. Estate and Succession Planning

Passing the business to the next generation is a major milestone—but it comes with potential tax liabilities. Estate taxes, gift taxes, and valuation disputes can present significant risks if unaddressed.

Start planning early by establishing a succession plan that aligns with your family’s long-term goals. Tools like family trusts and gifting strategies may minimize tax burdens while securing your legacy for future generations.

5. Compliance and Documentation

Family businesses are sometimes subject to additional scrutiny to ensure transactions between related parties are “at arm’s length.” Keeping detailed documentation—such as employment contracts and profit-sharing agreements—can help demonstrate compliance and avoid tax disputes.

How We Can Help

At Holbrook & Manter, we’ve helped countless family businesses overcome challenges and take the steps necessary to thrive. Here’s how we can guide your tax strategy and provide peace of mind:

• Personalized Tax Planning: Each family business is unique. We craft tailored tax strategies designed to meet your specific needs and growth objectives.

• Succession Planning Expertise: From estate tax analysis to ownership transfer strategies, we’ll ensure your business transitions seamlessly to the next generation.

• Year-Round Support: Taxes don’t just happen in April. Our dedicated team works with you throughout the year to anticipate changes, mitigate risks, and optimize your financial health.

When you succeed, so do we. That’s why our team always goes the extra mile to demonstrate our commitment to your business. Reach out to us today to get started.