Question

Explain how redeemable preferred shares are used in succession planning for small business corporations. ( Minimum 100 words)

Answer 1

In small scale business, mostly persons of the same family are involved and the business is transferred from parents to the children. For this shares are transferred in the name of the children. The tax laws require parents to receive consideration for the transferred shares which is generally paid off in the form of issuance of preference shares to the parents. This is done to secure the liquid assets of the company. Mostly, these preference shares come with voting rights too and in this way, control of the company often remain in the hands of the parents. Moreover, these shares are kept intact as they are redeemable only if the shareholder wants to redeem them. They might not redeem the shares so as to secure the liquidity position of the company. In this way redeemable preferred shares are used in succession planning by small business corporations.