Did you know that 87% of the businesses in the United States are family-owned? That’s 32.4 million family businesses and they contribute $7.7 trillion to the GDP.
Pat Soldano, a strong advocate for family businesses, joins Succession Stories host Laurie Barkman, The Business Transition Sherpa.
Pat is the President of Family Enterprise USA (FE-USA) whose mission is to promote the growth of generational-owned family businesses in the US. She is also President of Policy and Taxation Group that works to reduce onerous tax and economic policies for successful families, family business, and family offices.
Family Enterprise USA is relied upon to be the voice in Washington, DC for family businesses, generationally owned businesses, and multigenerational businesses across the US.
Listen in as Pat and Laurie discuss policy-related challenges, particularly around taxes and estate planning. Succession planning impacts family businesses and that proactive planning is the way to mitigate some of these challenges over time.
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TRANSCRIPT:
Pat Soldano, welcome to Succession Stories. I’m excited to speak with you. I was honored to see you speak at the Cornell Family Business Initiative on the campus some time ago, and I just felt that what you had to say was so important for family businesses to hear.
So, welcome.
Well, thank you very much. I appreciate being asked to speak with you today.
Yeah, let’s dive in. I want to start with this statistic, and I think the audience can relate because a lot of our listeners are founders and family businesses, that 87% of the businesses in the US are family owned. So, beyond the numbers, tell me why you believe family businesses are important in the United States.
Well, in addition to that, they generate 59% of the jobs in this country or 83 million jobs and 54% of the GDP or $7.7 trillion. That information wasn’t known until we did our research hiring seven professors and spending seven months with a very complicated checks and balances system to confirm our research that, in fact, family businesses are very, very important to this country and the economy. And we determined that because members of Congress asked us, well, why do I care about family businesses?
Why are they important to me? And why should I understand them? And we couldn’t really answer that in terms of the economics.
So, we use those statistics all the time. As you know, Family Enterprise USA is an advocacy organization and we advocate at a national level for family businesses, all sizes and all industries. We’re unique from a trade association because most trade associations work on the issues that affect the business.
We work on the issues that affect the families of those businesses. And we have now five trade associations that are members, trade association members of Family Enterprise USA and all of their members are now members of Family Enterprise USA. And they’ve come to us and we’re talking to a few more because they realize, just as I said, they don’t focus on the issues that affect the families of the business and they’ve learned anywhere from 65 to 90% of their members actually are family businesses.
So they realize this is something they need to address and they don’t do it necessarily as a trade association.
Gotcha.
All right.
I definitely want to come back to what the issues are, what’s important to family businesses. But before we go there, I know there’s another organization that you run that’s focused on a similar but different area. What is that?
So Policy and Taxation Group is an organization I founded in 1995. And it is a 501C4, whereas Family Enterprise USA is a 501C3 for all the tax geeks out there. So Policy and Taxation Group was formed to reform and ultimately repeal gift of state and generation skipping tax.
And we had some success along the way. The rate is actually now 40% coming down from 55%. And the exemption was $650,000, and now it’s $13 million per person.
But that’s going to expire at the end of 2025. And we’re very worried about that. But what we have found is Policy and Taxation Group addresses the tax and economic issues that affect family offices and successful individuals.
So you can appreciate there’s a lot of synergy between the two organizations, because Family Enterprise USA represents family businesses. And many successful individuals and entrepreneurs, of course, are family businesses. So the board of Family Enterprise USA came to me over four years ago and said, would you take this over?
It had become inactive. And it was formed in 2007 by a family. And I said, yes, because I think these organizations can work together.
And they do. They have different donors and supporters, but they have very similar messages. And members of Congress listen to family business owners as well as family offices and successful individuals.
I sat in on one of the presentations your team did, which talked about some of the learnings from the most recent annual family business survey. And I just want to underscore, because I don’t know that everybody in our audience listening understands what you just said and how big of a discrepancy those numbers are. Let’s just kind of come back to that in summary, what it was and what it is now and what it might be.
And this is the tax code. Is it the 199?
So are you talking about 199A?
Yes. Yes.
Well, certainly that’s one issue. And that provision is going to expire. It allows family businesses that qualify to deduct 20% of their income before they pay tax on it.
And it’s important because what we have learned is 80% of family businesses operate through what’s called a pass-through entity. So that means their income actually flows through to their individual tax return. So their business income flows through and is taxed at an ordinary income tax level, which is currently 37%.
Corporations, so the other 20% that are regular corporations, they only pay 21%. So there is this disparity, and 199A’s attempt was to try and correct that disparity, but it’s still got a long way to go. But it is a provision that helps family businesses, and it’s one of those that we’re very concerned about, as well as many others, quite frankly, that are included in what was the TCJA, which was passed in 2017.
So let’s talk about the Family Enterprise USA survey that you did, and what were some of the key takeaways from the 2024 survey?
Well, we surveyed across the United States with 789 respondents in 40 states. We’re very appreciative of the family business centers and many other organizations that help us distribute that survey to get those results. And we learned a lot of things.
We asked similar questions, and then we had new questions this year. And one of them was around that issue we just talked about, which is, do you operate as a pass-through? We had no idea the percent was that high.
But we’ve also learned that a large portion, in this case, 33% of family businesses operate as a manufacturing business, and only 5% operate as family farms. And then you have a great percent that operates in the retail industry and the construction industry. The point of that is most members of Congress, when I say family business, they say small business.
And then they say, like family farms. Well, the world has changed. Not that family farms aren’t important to this country, and they’re very significant to our economy, but only 5% of family businesses are family farms.
And yet a much bigger percent, in the case of manufacturers, 33% operate in the manufacturing world, and another 20-plus percent in construction. The reason I point that out is they have the same illiquid nature of their assets as farming does, right? And that’s why farming gets a lot of additional benefits, because illiquid nature of the business, the assets, and the complexity of the business.
And yet manufacturing, construction, retail, they have that same characteristic. So we need members of Congress to understand what family businesses are and what the makeup of those family businesses are in the United States.
You just pointed out a pretty big misconception. I’m sure there are more. You’ve been circling in the DC.,
working with government officials for a long time. And I’m sure you’ve got experience here. What do you think some of the other misconceptions are?
Well, again, they think that family businesses are all about themselves. They think, as an example, if the taxes were reduced, all taxes, but the estate tax, income tax, if they were reduced, family businesses would just pay themselves more. So we asked that question.
What would you do if you had lower taxes? Well, the vast majority of them, over 50%, said, I would reinvest in my business. And then another 30% said, I would pay my employees more and give them more benefits.
And only 8% of those surveyed said they would actually distribute more to themselves. And that’s not a surprise to us because we know that family businesses plan their business as a legacy. They plan it for generations and generations.
And in fact, we found that over 30% of our family business owners operate, have operated over 50 years. So 50 to 100 years. It’s amazing, but that is the mentality of family businesses.
And again, a statistic that most members of Congress don’t know or understand.
Yeah, it kind of makes sense if you think about it. So many long-standing companies got started when we were in this agrarian society and are still around today. It’s a handful of them, but it’s sometimes in the spirits or alcohol, right?
And they grew the apples, they had these farms and the agrarian side of what became the family business. But yeah, times have definitely changed. It’s a really important message for Congress to understand who their constituents are.
I know there are some members of Congress who come from family businesses or who have worked in business settings and they have familiarity with multi-generational companies. But look, it’s an election year. And I know that there’s a lot of things that we’re always trying to educate our government officials on.
But when you think about the important issues, what should we be sharing with them and be concerned about?
Well, they should be sharing their story. And we think that’s the most powerful thing, which is, as you’re aware of, we got Congress to actually form a Congressional Family Business Caucus. To your point, we did our homework and we researched all members of Congress and found out a hundred of them come from family businesses or have family businesses.
So when we decided this Congressional Family Business Caucus made sense, again, to not only get members of Congress to understand family businesses, but also voters, because they don’t understand them either. They all perceive family businesses as wealthy. And while some may, we know that wealth isn’t always liquid, especially in a family business.
So the caucus, we’re very excited. It’s a bipartisan caucus, as we are in both entities, both companies. We think it’s critical in tax and any other kind of legislative policy to make sure it’s bipartisan.
We now have 44 members of this caucus, and we’re coming up to two years now. About 40% are Democrats. We’re very proud of that.
And it’s an educational caucus. So we’re just trying to educate. So we have videos during our last caucus meeting.
We were just in DC on May 14th, in which we had about 15 executives of family business centers. And then we had a dozen family businesses, seven of which told their family business story at the caucus meeting, which we record and send out on all social media and everywhere else. And we have a lot of family business stories on our website because, well, members of Congress, they like the statistics that I can tell them, but nothing is more powerful than the family business telling them themselves their history of their business and what they would do and how does tax and economic policy really affect them and their bottom line and their families and their employees and their community.
What we learned in our survey this year, 50 percent of family businesses, and last year that percent was 70, give to their local charities. Now it’s a local charity or it could be a local chapter of a national charity. The reason that’s again an important statistic that members of Congress don’t know or haven’t connected the dots on is if the family business has to be sold to pay the estate tax or for some other economic legislative reason due to regulation or other policies that our government sets, that local community goes away.
That local boys club, Girl Scouts, YMCA, those things, that all that giving goes away. So it’s very, very impactful. It affects the family’s livelihood.
It certainly impacts the employees’ livelihood and it affects the community as well.
There’s a lot that’s been uncovered through the survey and the data and these conversations that are happening. There’s hopefully some winds of change that will keep the momentum going. As you think about the key issues for family businesses, multi-generational companies, we’ve mentioned a few issues, right?
We’re specifically related to taxation and the state implications, not only from a current business, but also in the future and the legacy that’s left with our stakeholders. What are some other issues that are on the minds of family business owners?
Well, some of the legislative issues, to your point, in the TCJA, which is going to expire at the end of 2025, income tax is going to go back up, capital gains tax is going to go back up, 199A will go away. Already what’s happened is R&D expensing has been eliminated. So now all R&D has to be capitalized over five years, which is very problematic for manufacturers.
Many of them just stop doing R&D, which isn’t good for anyone. Bonus depreciation is already gone. Some of the interest deductions for family businesses is gone.
Through the Build Back Better Act, which was proposed over two years ago, there were provisions, all those provisions were in it. We fought back against those provisions, so they didn’t get in the Build Back Better Act. In fact, we had six removed in the House bill and then another four in the Senate bill.
But things like elimination of grantor trusts. Family businesses use grantor trusts to plan. They’re really, really important.
I don’t think our legislators see it that way. They see it as some sort of scheme or way to defraud our government of taxes. And that’s not what they’re used for.
So we’re very concerned about that. There was a provision that family businesses couldn’t hold their family business in their IRA. They would have had to distribute it out and pay the tax on that.
That doesn’t make any sense. And I will say, members of Congress, both sides of the aisle, when you give them reasonable explanations and examples of how destructive things could be, they do listen. Most of them listen.
And they’re rational people, so they want to do what’s right. And that’s, again, why it’s so important for family business owners to talk to their members of Congress and tell them how this legislation or regulation has really impacted their businesses.
Yeah, and I think for anyone listening, wondering, am I in this category? If you own your business and it is not a C Corp, and the implications are that your taxes are passed through to the bottom line, your tax at an ordinary tax rate. So that encompasses a lot of entrepreneurs.
It doesn’t just have to be multi-generational family businesses. So if somebody is thinking, oh, well, I’m not a third-generation company. I’m the founder.
I’m the first gen. But this still matters. This still is relevant.
And especially for companies, I liked how you broke the myth that these are all kind of the small mom and pop or the farms. You mentioned there’s quite a number of businesses in your data that are over 50 million in revenue, which is really sizable.
Well, in fact, 15% of our respondents to our survey, it was a surprise to us, have over $100 million a year in revenue. So, you know, it’s really important that we understand the job creation, not just in small business but in medium and large businesses as well. And to your point, you don’t have to be a very big business to reach the threshold of $13 million.
Now, granted, if you’re married for couples, $26 million, which is a huge exemption, the highest it’s ever been, but it’s going to go away. It could drop down to $5 million, $7 million, maybe even as low as $3 million. So I’ve just been talking to everybody I can, saying, do your planning, because, and to your point, it doesn’t matter if you’re first generation or second or third, you really need to do it now.
And we had, at our Congressional Family Business Caucus that we facilitated, we had family members say how they planned for succession. One individual said, I actually gave away my business to my six and seven year old, because that was how I could manage the payment of the tax or deferring the payment of the tax, which if I didn’t, the business wouldn’t be in business today. So, you know, you need to really look at the legislation and more importantly, talk to your tax accountant and your state attorney and see if you really need to take advantage of the exemption as much as you can, as soon as you can, and do all the planning that you can, not just for tax avoidance, but also because you need to plan for the next generation.
You know, a lot of first-generation entrepreneurs hate to focus on their demise, but it is a reality. And we survey every year about how, if, and how they’ve passed on ownership. It’s very discouraging to me that still the vast majority of them have not passed on control.
It’s less than 36%. So they give up a certain percent, but they just can’t give up control. And I hear all the same excuses every year.
Well, you know, it’s not a good time for the business. The economy is not good. The market isn’t good.
My kids aren’t old enough, even though some of them could be in their 50s and 60s. They’re not ready yet. There really is, they’re not ready.
They have to get ready because if you don’t pass the business on early enough, the taxes will definitely deplete it. And also, the family business won’t continue to operate if you don’t have a good succession plan, as you well know, in place. It’s just so, so critical to the livelihood of the family and the employees as well as the community.
That was well said, Pat. Well said. So many things there.
One theme that I say all the time on this show, right, is we’ve got to work when time is on our side. You can’t do exit planning when you’re exiting. It is just too late.
You have underscored that in a huge way. You’ve also underscored the importance of getting professional advisors to help you not only do the tax planning, as you said, in tax mitigation, but there’s also the legacy planning. And we get a lot of joy from that, right, as we think about how what we’ve created can be, can live on beyond us and be a sustainable entity if that’s what the family wants or the stakeholders want.
So there’s a lot of really important points there. I’m so glad you shared that. Is there anything that I didn’t ask you today that you wanted to share with me?
Yeah, I was just going to say is what’s really important is it’s always a challenge to create some sort of sense of urgency around estate planning because people don’t want to think about it. They don’t want to talk about it. And to your point, they always figured they’ll do it later.
There’s no time to do it later now. This this tax policy that’s going to expire if nothing else should motivate you. The other thing that should motivate people is this the year state attorneys are all going to be way too busy next year.
If you’re not already talking to them, if you’re not already doing your planning, if you wait till next year, they’re going to say, I’m sorry, we can’t help you. We’re overburdened. And if you think that you can do estate planning on December 31st of 2025 and it’s going to hold water at the IRS, it’s not.
So again, it takes valuation work in order to pass your business on or any of your assets on. It takes the state attorneys and tax accounts help. And they’re all going to be incredibly busy next year.
So that’s been my warning for people. This is a sense of urgency to your point. Time is on your side.
You need to do it today.
That’s a great message. So let’s recap, summarize the top two or three things that you really want people to take away from today’s conversation.
Well, obviously, the one is what I just said, which is do your planning and do it as quickly as possible and make sure it’s thoughtful. It’s not just about tax avoidance. Make sure you consider all the nuances of the family itself as well as the business so it will survive for generations to come.
The other thing I will say is I’m a huge proponent of advocacy. I believe in it. I believe it’s our system in America and people that don’t advocate are not going to be happy with the results.
So I really, really encourage people to talk to your member of Congress. Call them on the phone even if you just leave a message with the staff person. Make it short, but make sure they know what you’re calling about.
Make sure you have an ask. Don’t just rant and rave and carry on. Tell them what your issues are.
Be succinct and have an ask. In our case right now, we have two asks. One is join the Family Business Caucus so you can see what’s happening and you can hear the message.
The other is there is this rate reduction bill that’s been introduced in the House and ask them to sign on as a cosponsor of that bill. But you can do that through certainly emails if you’re in their district as well. Go to town hall meetings.
They don’t have as many of those anymore. Go to fundraisers. Yes, you have to write a check, but you go to the fundraiser.
And if you go, you have to go up and talk to the member of Congress. That’s what they’re there for, to talk to you. Again, be succinct, be polite, but tell them what your issue is.
And I think some people are afraid to do that. They’ll go to the fundraiser, the member of Congress has to say, and then they leave. You can actually email the member and say, I’m going to be at your fundraiser, or I’m going to be at your town hall meeting.
And I want to ask a question so that you can not only ask it to the member of Congress, you can get it in front of 50 to 100 people. I just did that with one of the presidential candidates. So, you know, you really have to let your voice be heard.
You can certainly still send letters. And I would just encourage people to get to know your member of Congress. Make a meeting in your district office.
It’s only 15 minutes, 20 at the most. And you may just meet with a staff person, but ask who you can follow up with in their DC office. Again, by email or maybe you’re there in person.
Whatever method, it all works. Just make sure you do it.
That’s a great, great message and encouragement and very specific, actionable ideas that you shared, Pat. So thank you so much. If people want to learn more about Family Enterprise USA or about other initiatives that you’re working on, what’s a good way to follow up?
“Yes, so certainly go visit our websites. They’re pretty simple. It’s either feusa.us or patg.us or the other website, which most people understand better, I think.
It’s Family Enterprise usa.com and Policy and Taxation group.com. So Policy and Taxation group.com. So I think that there’s lots of information on those websites.
There’s white papers, there’s articles, there’s videos, there’s podcasts, webcasts. Go on those for resources as well as ways that you can communicate with your members of Congress and just become more knowledgeable about what’s happening.
It’s a wonderful resource that you’re providing. Thank you so much for coming on the show today and talking about the good work that you and your team are doing.
Well, thank you for having me, Laurie. I really appreciate it. Great opportunity and I hope you have a great rest of your day as well.
Thank you. And to our listeners, thank you so much for tuning in. Be sure to sign up for our newsletter so that you catch all of Succession Stories’ new episodes.
And you can also find us on YouTube at The Business Transition Sherpa. Tune in next time for more insights from transition to transaction.
I hope that today’s episode resonated with you. What actions will you take as a result? If you want to grow, sell, or transition your business, our strategic transition planning process provides clarity and objectivity on the big questions that may be weighing on your mind.
Make an intention and take the next step. Set up a complimentary consultation with me to discuss your goals at thebusinesstransitionsherpa.com. That’s thebusinesstransitionsherpa.com.
