What is the best retirement plan for a self-employed contractor?

A solo 401(k) or SEP IRA may be worth considering when the owner has no eligible employees. The better option depends on income, desired contributions, administration, and whether employees may be hired.

Can an HVAC company offer a 401(k)?

Yes. An HVAC company may establish a 401(k) for eligible owners and employees. The plan must follow its documents and applicable contribution, testing, disclosure, and filing requirements.

Can a business owner contribute more than employees?

Possibly. Certain 401(k), profit-sharing, and cash balance plan designs may allow different contribution results, but applicable testing and plan rules must be satisfied.

Is a SIMPLE IRA better than a 401(k)?

A SIMPLE IRA may be easier and less expensive to administer. A 401(k) may provide greater flexibility and higher potential contribution opportunities. The better choice depends on the company.

Can a contracting business have both a 401(k) and a cash balance plan?

A business may be able to maintain both plans. This combination can create larger contribution opportunities, but it also increases cost, complexity, and funding responsibilities.

How Can I Transfer My Business to My Kids If They Can’t Afford to Buy Me Out?

Kendall Maccagnan

Oct 1

6 min read

By Kendall Maccagnan, CPA, CFP® and Financial Advisor in Tampa, Florida

You may want your children to continue the company, but they may not have enough cash to purchase your ownership outright. At the same time, you may need money from the business to fund retirement.

One strategy worth understanding is a corporate stock redemption, where the company buys your shares instead of requiring your children to personally finance the purchase.

For business owners in Tampa Bay and across Florida, this can be an important option to consider when coordinating family business succession planning, retirement income, and taxes.

What Is a Stock Redemption in a Family Business?

A stock redemption simply means the business purchases an owner's shares back from that owner. Imagine you own most or all of a family corporation and your adult children are already involved in the business. You want to retire and transfer control to them, but they do not have enough personal savings to buy your shares.

Instead of having your children write you a check, the company may redeem your shares using:

Cash already available in the business
Cash generated through future operations
A promissory note owed to you by the company
A combination of cash and a note

After the redemption, you no longer own the shares, and your children can continue owning and operating the company. Put in simple terms, the business essentially helps fund your exit rather than requiring your children to personally fund the entire purchase.

How Can a Stock Redemption Help With Family Business Succession?

The biggest challenge in many family business transitions is balancing two competing needs. The parents may need significant cash to support retirement and the children may be capable of running the company but lack the personal capital needed to purchase it. A corporate redemption can potentially bridge that gap.

Rather than asking the next generation to borrow a large amount personally, the company itself may use its financial resources to purchase the retiring owner's shares. The important limitation is that business has to be able to afford it.

If the company does not have sufficient cash or cannot generate enough cash flow to meet the redemption payments, the strategy may not work. This is one reason succession planning and business cash flow planning should happen together.

How Is a Family Business Stock Redemption Taxed?

When the business buys back a parent’s shares, there are two very different ways the payment can be taxed.

Ideally, the transaction is treated like a sale of the parent’s ownership interest. In that case, the parent can generally use their tax basis in the stock to reduce the amount of taxable gain.

But if the redemption does not qualify as a sale, the payment may instead be treated as a corporate distribution, which can result in a less favorable tax outcome.

The complication in a family business is that the IRS may still treat the parent as owning stock held by their children, even after the parent has sold all of their actual shares. That is where the family attribution rules come into play.

The Family Attribution Rule

Even if you sell every share you personally own, the tax rules may still treat you as an owner because your children own the company. For purposes of these redemption rules, stock owned by certain family members including your spouse, children, grandchildren, and parents can be attributed back to you.

For example, suppose the company buys back all of your shares and your daughter becomes the sole owner. From a practical standpoint, you are out of the business. But for tax purposes, the IRS may initially treat your daughter’s shares as though you still own them.

If the IRS still considers you an owner, the buyout may not be taxed like a normal sale of your shares. Instead, it could be treated as a corporate distribution, potentially increasing the amount subject to tax.

There is a way to potentially waive these family attribution rules when certain requirements are met, which is why how you step away from the business after the sale matters just as much as selling the shares themselves.

Can You Avoid the Family Attribution Rules?

In certain circumstances, the retiring owner may be able to waive the family attribution rules so the redemption qualifies as a complete termination of ownership.

The parent generally cannot continue having a disqualifying interest as an offficer, director, or employee. Interestingly, the parent may still be able to serve as a consultant.

The parent can also remain a creditor of the company which may be important if the business purchases the shares partly through a promissory note that is paid over time.

The parent also generally cannot reacquire stock in the company for 10 years, except through inheritance or bequest.

What Happens If the Redemption Does Not Qualify as a Stock Sale?

If the redemption does not meet the requirements for sale treatment, the IRS may treat the payment differently than the owner expected. Instead of treating the transaction like a normal sale of the parent’s stock, the payment may be treated as a corporate distribution.

In a qualifying stock sale, the owner can generally use their tax basis in the shares to help determine the taxable gain. If the redemption is treated as a distribution instead, that favorable treatment may be reduced or lost, depending on whether the company is a C corporation or S corporation and the owner’s specific tax situation.

Bottom line: two transactions that look almost identical economically can be taxed very differently. That is why the redemption should be structured with the tax rules in mind before the buyout is completed, not after the family has already agreed on the terms.

Can You Still Help Your Kids Run the Business After You Sell?

Potentially, yes. You may want to give up ownership but still be available to mentor your children, help maintain key relationships, or provide strategic guidance. Although the retiring shareholder generally cannot remain an officer, director, or employee when relying on the family attribution waiver, serving as a consultant may be permitted.

The Bottom Line: Your Business Can Help Fund a Family Succession

Passing a business to your children does not always require them to personally come up with enough money to buy you out. A corporate stock redemption may allow the business itself to purchase your shares using cash, future cash flow, a seller note, or some combination of the three.

The transaction needs to work on two levels. First, the business must have enough financial capacity to fund the redemption without damaging operations. Second, the transaction needs to be structured carefully so the retiring owner's continued relationship with the business does not create unintended tax consequences.

For Tampa Bay business owners considering a family business succession, the goal should not simply be transferring the company. It should be creating a transition that works for the next generation and supports the retiring owner's personal financial plan.

Next Steps

If you are thinking about eventually transferring your business to your children or other family members, feel free to book a consultation to discuss how your business succession plan, cash flow, taxes, and personal retirement goals fit together.

Frequently Asked Questions About Transferring a Family Business to Children

How can I sell my business to my children if they cannot afford to buy it?

One option may be a corporate stock redemption, where the company purchases the parent's shares rather than requiring the children to personally fund the entire purchase.

Can a business use a promissory note to buy out a retiring owner?

Yes. Redemptions may be funded with cash, a note, or a combination of both.

Can I still work in the business after my shares are redeemed?

Possibly, but the role matters. When relying on the family attribution waiver, the retiring owner generally cannot remain an officer, director, or employee, although serving as a consultant may be permitted.

Why do family attribution rules matter when transferring a business to children?

Because tax rules may treat a parent as owning shares held by certain family members even after the parent's actual shares have been redeemed. Specific requirements may need to be satisfied for the transaction to qualify as a complete termination of ownership.

When should Tampa Bay business owners start family succession planning?

Ideally, before the owner needs to retire. The company's cash flow, ownership structure, retirement needs, and tax treatment all may affect how a family business transition should be structured.

This content is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. It is not intended as a solicitation or offer to provide advisory services in any jurisdiction where Off the Bay Wealth, LLC is not properly registered or otherwise permitted to operate. Information presented is based on sources believed to be reliable; however, accuracy and completeness are not guaranteed. This material is not intended to be a comprehensive analysis of all topics discussed. IRS provisions are subject to ongoing guidance and regulatory updates. Any financial decisions should be made in consideration of your individual circumstances, including your goals, risk tolerance, and time horizon. Investing involves risk, including the potential loss of principal.