In business, change is inevitable; and as a business owner, you’ll eventually have to transfer business ownership in part or in whole. Whether you come across new opportunities or develop different goals, experience a major life-changing event or are approaching retirement, a change of ownership will ensure your business endures even after you take a step back or step away.
When it comes time to transfer business ownership, think of the process as more of a life transformation than a mere transaction. It’s not just about cutting a deal, but also making a transition plan to guide you through the next phase in your life.
We’ll walk you through the basic process of how to transfer business ownership, how to transfer business ownership based on your company’s structure and tackle frequently asked questions.
Questions You Need to Ask Yourself
Once you’ve decided that you’re going to transfer business ownership, you need to consider 4 key questions. These are:
- What will I do next?
- Can I get my asking price?
- How much money do I need?
- What do I truly want?
The first question is meant to ward off the feelings of regret that many business owners experience after selling their company or its assets. Your business is a huge part of your life, and after the transfer of business ownership, you might need to find new sources for the social and intellectual fulfillment your company provided.
Second, you need to learn — from a qualified professional — whether there’s a gap between what the market is willing to pay for your business and how much money you need. This feeds into the third question, which asks you how much money you need to live comfortably through your retirement or transition period.
Last, do a little soul searching to find out what you want from your next life chapter. Money is one thing, but chances are you want more than deeper pockets. Jot down what’s most important to you, and whether a change of ownership for your business will help get you there.
How to Transfer Business Ownership
If you want to know how to change ownership of a business, your answer will depend on the kind of change you want to make. There are a few methods to transfer business ownership aside from an outright sale.
Selling the Business
To sell a private business, you have 2 options: an owner-financing sale or cash financing. In the former, the buyer purchases the company over time by paying installments agreed upon in the transfer of business ownership form. For the latter, the buyer pays for the company upfront in cash using a loan or capital savings after agreeing on a valuation for the assets.
Adding New Partners
Another method of transferring business ownership is to bring in new partners who will have to each pay for their ownership interests. Under this kind of arrangement, new shareholders buy into the company, typically with cash, to transfer the majority of the share capital out of your hands.
Giving It to a Family Member
A common method of relinquishing ownership of a business, especially for retirees, is to hand the company to a son or daughter or another relative. If you want to transfer business ownership to a family member, it could be done as a full or partial sale, but it can also be a gift. This transfer of business ownership can be completed tax-free if you gift shares of the company valued at $15,000 or less annually in regular installments.
Lease-Purchase Agreement
For intrepid buyers, entering a lease-purchase agreement is a safe choice. This is because the lessee is only entitled to the ownership of the company through the duration of the lease, after which the buyer can decide whether to buy the company, renew the lease or relinquish control.
Transfer of Business Ownership: A Basic Walkthrough
Imagine the following scenario:
You own a limited liability company (LLC) and decide to bring in a new partner who will own 33% of the company for a cash price of $50,000.
Now let’s go through the basic steps of transferring part of the ownership of an LLC.
Step 1: Navigate Regulatory Waters
First, you need to explore the regulatory restrictions placed on the transaction under state law. In some jurisdictions, you must report all changes of ownership in your business unless the state failed to record member names in the Certificate of Formation when the company was first incorporated.
A Certificate of Amendment must be issued to state authorities reporting the personnel changes if your name was recorded at incorporation.
Step 2: Update Operating Agreement
Next, you need to amend the operating agreement and all other internal documents to reflect the changes to management. Once you include the details about the change in ownership and the valuation of the investment, have the document(s) notarized.
Step 3: Issue Membership Certificate
In this scenario, a new ownership certificate must be issued within the first month and a half of the transaction that specifies that 33% of ownership has changed hands. The new owner must keep this certificate for the company’s books.
Can You Transfer Ownership of a Sole Proprietorship?
Technically, you can’t legally sell all of a sole proprietorship. The nature of its ownership structure means several aspects are non-transferrable, including the business’s legal name — which is your own name — as well as debts and other liabilities. However, you are allowed to change the ownership of all the business assets. Once you separate the debts and other elements that will remain yours, you can transfer the “doing business as” (DBA) name to the new owner as well as ongoing contracts and property. Once you transfer business ownership, the company dissolves and the buyer restructures the assets under a new business entity.
How Is Ownership Transferred in a Corporation?
The corporate structure of your company will determine how to transfer business ownership. The business organization impacts everything from how you file your tax return to how you execute and enter into contracts.
LLC
Transferring ownership of an LLC should be handled according to its buy-sell provision in the operating agreement. Each member of the LLC who wants out of the company must sell their share of the company to a buyer and draft a new operating agreement and Certificate of Amendment to update member names.
Partnerships
The operating agreement should spell out each partner’s share of the company. So when you change ownership of this business structure, each partner is free to transfer interests in the company to other members or amend the operating agreement to reflect a buy-sell agreement.
The Schedule K-1 tax form will articulate how ownership transfer has occurred at the end of the tax year.
C Corporation
For a C corporation, private business ownership is determined by the shares held by each owner. Each share’s value is evaluated to price the stock, and it’s then recorded in the company’s books. The seller must record a capital gain on the shares sold compared to the price at which it was originally bought.
S Corporation
An S corporation is like a C corporation with the main difference being that the former cannot exceed 100 shareholders and that all incomes and expenses are taxed through the owners and not at the corporate level. A standard transfer of business ownership agreement and a Schedule K-1 tax form reflecting capital gains and losses is all one needs to transfer business ownership.
Transfer of Business Ownership: Frequently Asked Questions
What happens to my company when I die?
In the event of your passing, the corporation lives on in perpetuity, so it’s important that you consult an attorney to arrange an estate plan. Having an estate or succession plan in place will provide power of attorney to execute your will after your death, such as if you want to transfer business ownership to a family member.
Your estate plan should include a new shareholder agreement that spells out who will own your interest in the company after your death. Then a Certificate of Amendment will be issued to amend the directors or members of the company.
Can you transfer an EIN to a new owner?
You can transfer an employer identification number (EIN) to a new owner if they don’t want to form a new corporate entity with your assets. If the new owner does want to start over after the transfer of business ownership, they must use their Social Security number to apply for a new EIN through the Internal Revenue Service.
How do I handle other elements when I transfer business ownership?
Consult your state’s regulations — and follow up with an attorney, if necessary — to ensure you’re following correct procedures for transferring a business license, trademarks, permits and anything else the business needs to legally operate.
How do I close the sale of the business?
To transfer business ownership and formally close the deal, have an attorney draft the buy-sell (or lease) agreement. Ensure that the agreement specifies precise terms, such as whether the assets will be purchased with cash, installments or with some money down. Upon both parties’ signatures, the agreement will be legally binding, and the ownership will have transferred.
