Small businesses are the backbone of the economy and most are family owned. Despite these large numbers, the sad fact is the vast majority of family owned businesses do not survive the first generation of owners.

Nobody really thinks they might die tomorrow. Obviously, you can. There is no guarantee you won’t have a massive heart attack, get hit by a drunk driver or who knows what. If one of these grim events happened, what would happen to your family owned business? Your family would know your wishes, right? Unfortunately, this is rarely the answer. Throw in tax issues and the business could fail.

The facts related to the continuation of family owned businesses from one generation to the next are both clear and scary. Family owned businesses make up the vast majority of all businesses in the country. Despite this fact, only 30 percent survive when the second generation of family ownership. Even worse, only 15 percent survive through the third generation. These facts are provided by the Small Business Administration.

As the business owner, you probably have some inkling of what you want to happen to the business when you are no longer around. Perhaps you want one or more of your children to run it. On the other hand, you might just want it sold and the revenues distributed among family members. The point is you can make a choice now. If you pass away, however, the courts and IRS will make the choice for you. Does that sound like a good idea? It should not.

With a family owned business, the family dynamic cannot be understated. If you have kids, the issue of who gets what and who runs the business is a major issue to be addressed. If you do not have your wishes in writing, they may be disregarded. Various family members may have an incorrect interpretation of what is supposed to happen with the business. If you have not indicated in writing the plan, they will end up in court arguing and a poor judge is going to have to try to figure it out. The final decision will probably not reflect your desire.

The IRS is also going to want their piece of the pie when the business ownership is transferred. Many mistakenly believe a family owned business is transferred tax-free. This is not the case. In fact, the tax liability can be over 50 percent of the total value of the business. Making sure there is a financial plan in place that will provide funds for the tax liability is critical. It is the rare business that can survive paying a tax bill equal to fifty percent of its value.

Planning for the transfer of a family owned business is something that should be undertaken immediately. It may seem like a future issue, but one should not take life for granted. If you don’t get your ducks in a row, your passing could lead to a disaster for your family on both an emotional and financial front.

Learn more about succession planning at UFCAmerica.com.