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It’s Time for California to Put Family-Business Designation into State Law

Back Commentary Oct 11, 2019 By Ken Monroe

Family businesses have been the backbone of California’s bustling economy since statehood. I’ve witnessed this firsthand as the proud owner of a family business that dates back to 1931, providing Caterpillar equipment in 16 counties throughout the state — from Merced to Yuba City — for a wide range of customer needs, including heavy construction and agriculture.

Our company, Holt of California, was a founding member of the Family Business Association of California in 2012, an organization that helps advocate on behalf of these businesses, which are  integral to the economy.

Why are family businesses important? Take a look at the data: Score, America’s premier source of free business mentoring and education, found that family businesses nationwide generate 64 percent of the nation’s gross domestic product, employ 60 percent of the workforce and create 78 percent of all new jobs. In California alone, an FBA study in 2012 found that 1.4 million family businesses collectively employ seven million people. As the economy has grown during the past decade, it’s all but certain that those numbers have grown.

But there are other characteristics that make family businesses unique: They generally take the long view on many issues, including updating education standards to enhance career paths for our families and employees, working to ensure a quality environment for future generations, and extending a helping hand to others in our communities to aid their rise up the economic ladder. They are also more likely to promote women to executive management.

Despite these benefits, family businesses face numerous challenges. Federal estate taxes make it difficult to keep businesses family-owned from one generation to the next — and state lawmakers are proposing to enact a new California estate tax as well. To complicate matters, succession planning has become more difficult for family-owned businesses as generations break from the family operation to forge their own paths: Only about 30 percent of our businesses survive into the second generation, just 12 percent are still viable in the third generation and a tiny 3 percent operate into the fourth generation and beyond.

But while nearly everyone instinctively understands the importance of family businesses and the characteristics that separate us from public companies, there is no standard definition of family business. That makes it difficult to really pin down the full economic benefit those companies provide.

There are other problems as well. An example when legislation was proposed in 2014 to address complex property transfers and close specific perceived loopholes. In an unintended consequence, Assembly Bill 188 would have eliminated the “widowed exemption” that allows property to be passed to a remaining spouse upon death without requiring reassessment. To solve this problem, FBA had to propose that a three-page definition of a family business be inserted in this section of the tax code.  

To ensure family businesses are treated appropriate to their contribution to California, FBA is sponsoring Senate Bill 483 by Sen. Richard Pan, D-Sacramento, which would define family-owned businesses as those domiciled in California, in operation for 10 years or more, and are owned and controlled by an individual or related persons or a partnership of related persons that have passed the business through a generation or have a plan for future generational succession. This standardized definition will assist policymakers in determining the effects these businesses have on the economy. Further, this bill will let California lead the nation when considering the affect of future legislative and regulatory actions with decision makers who are knowledgeable of  the unique benefits and special challenges of operating family-owned businesses.  

SB 483 passed the state Senate unanimously this spring and is now pending in the Assembly. When lawmakers reconvene in January, we urge the Assembly to quickly pass the measure and send it to Gov. Gavin Newsom for his signature.

State law already has definitions in place for small businesses, microbusinesses and disabled veteran’s business enterprises. It’s time lawmakers provide the same clarity and understanding for family businesses.

Ken Monroe is the chair of the Family Business Association of California and president of Holt of California.

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