A generational change is when a business, regardless of the legal form in which it is run, must be handed over to the next generation, either in the owner’s own family, to an employee, or changes ownership to others.
Fundamentally, generational change is about securing your company’s future, even without your presence.
A change of generations involves many emotions, big questions and to some extent also a risk of conflicts in the family.
In addition, the transition can cause the company to become vulnerable, because liquidity, management, employees and other relationships are suddenly at stake.
In addition, there are many different rules that must be taken into account: inheritance law, tax and duties, financing etc
It is therefore extremely important that the process is organized well in advance, so that the transition can take place in a controlled manner and at a pace so that the process is controlled.
Changes in ownership structure due to generational change
Changes in ownership structure, in connection with the transfer of a business to the next generation, therefore require thorough preparation and detailed planning for it to be successful for the current owner as well as the future owner.
In the event of a generational change, the ownership structure can be changed at once or in several planned stages.
Whatever you choose, with careful consideration and preparation, you will get the best results, both in the short and long term.
Restructuring models at generational change
There are many ways to restructure the company, including tax-free company conversion, share exchange, demerger, and the addition of assets.
Company transformation into a joint-stock or limited liability company upon generational change
Ownership structure and company form are inextricably linked to the opportunities and challenges you will face in connection with a generational change. If you run a company under personal auspices, it may be relevant to consider converting the company into a joint-stock or limited liability company to facilitate the generational change.
However, it is always the specific situation that determines whether a tax-free conversion to a limited liability company has more advantages than a taxable transfer.
Establishment of a holding company in the event of a change of generations
If you run a business in company form, it is often relevant to establish a holding company that will own the operating company. In connection with a change of generations, the holding company structure makes it possible to transfer shares or shares tax-free between e.g. parents’ and children’s holding companies, as well as to isolate operating assets and surplus liquidity in the parents’ holding companies.
If a holding company is to sell shares in a subsidiary company tax-free, the holding structure must, as a general rule, be established at least three years prior to the sale.
Although establishing a holding company can be a useful preparation for the generational change, this can never stand alone.
Financing, ownership structure and tax
Financing a change of generations depends on many factors, including the financial capacity of both generations. If the change of generations triggers gift tax and capital gains taxation, this must be financed from personal taxed funds. If the taxes and duties are significant, the financing will often require large withdrawals from the company, which will impair the company’s opportunities in the future.
It is therefore often of absolutely crucial importance for the company’s future opportunities and performance that the generational change and the company’s ownership structure are organised.
Changes in ownership structure, e.g. in connection with the transfer of a business to the next generation, requires thorough preparation.
The various forms of generational change all have both advantages and disadvantages and therefore require careful consideration and the involvement of relevant sparring partners to implement a successful generational change that involves all aspects of the economy, tax, law and the managerial aspects thereof.
At DreistStorgaard, we advise on all aspects of the generational change. Contact us for an informal chat about how we can help ensure the best possible handover from one generation to the next.
