Transferring Your Existing Business To A Partner, Family Member or Other Entity? Here’s How To Do ItBarb Weidner
In business, change is an inevitability. As a business owner, you must be prepared to address change as new demands arise. If a major life event comes up that prevents you from running your business as usual, or if you see retirement in your future, then you need to be prepared to sell the company.
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 comfortably through the next phase in your life.
In this guide, we’ll walk you through the process of transferring ownership the right way—without suffering from seller’s remorse.
Questions You Need to Ask Yourself
Once you’ve made the decision that you are going to transfer business ownership, you need to seriously consider four key questions. These are:
- What will I do next?
- Is there a gap?
- 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 off their company or its assets. Your business makes up a huge part of your life, so you must find replacements for the social and intellectual aspects of your life that will be thrown to the wayside after shedding ownership of your company.
Second, you need to find out—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 it is you want in life. Money is one thing, but chances are you want more than deeper pockets. Jot down what’s most important to you, and whether a transfer of business will help get you there.
Methods of Transferring 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. Technically speaking, there are a few ways to shed ownership of a company aside from selling it outright.
Selling the Business
To sell a private business, you have two options: an owner-financing sale, or cash financing. In the former, the buyer purchases the company over time in the form of installments agreed upon in the transfer of business ownership form. For the latter, the buyer pays for the company up front in cash using a loan or capital savings after agreeing on a valuation for the assets.
Adding New Partners
Another method to transfer 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
We are often asked how to transfer business ownership 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. Handing down the family business can be done tax-free if you gift shares of the company valued at $15,000 or less annually in regular installments.
For intrepid buyers, entering into 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 altogether.
Transferring Ownership: A Basic Walkthrough
Once you have decided to sell your business, you need to take action. To help you understand how to change ownership of a corporation, imagine the following scenario: you own a limited liability company (LLC) and decide to bring in a new partner who will own 33 percent of the company for a cash price of $50,000.
Step 1: Navigate Regulatory Waters
Your first order of business is 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 percent of ownership has changed hands. The new owner will be obliged to keep this certificate for the company’s books.
Selling a Sole Proprietorship
Technically, you cannot legally sell a sole proprietorship. However, you can freely sell all the business’s assets, from the name of the company to ongoing contracts and property. Once you transfer business ownership, the company dissolves and the buyer restructures the assets under a new business entity.
How To Change Ownership of a Corporation
To find out how to transfer business ownership of your company, you will need to determine what type of corporate structure your business is organized under. Business organization impacts everything from how you file your tax return to how you execute and enter into contracts.
Limited Liability Company (LLC)
A change of ownership business for an LLC is relatively straightforward because LLC operating agreements are permissive regarding buy-sell provisions. 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.
When we are asked how to change ownership of a business, it is typically a general partnership corporation that is being asked about. Under this corporate structure, each partner’s share of the company is spelled out in the operating agreement. They are 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, otherwise known as the transfer of business ownership form, will articulate how ownership transfer has occurred at the end of the tax year.
For a C corporation, private business ownership is determined by the shares held by each owner. The value of each share needs to be evaluated to price the stock, which is then recorded in the company’s books. The seller must record a capital gain on the shares sold compared to the price it was originally bought at.
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.
Frequently Asked Questions
What happens if I die?
In the event of your passing, the corporation lives on in perpetuity. For this reason, it is 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 transferring business ownership to a family member.
In your estate plan, you should include a new shareholder agreement that spells out who will own your interest in the company after death. A Certificate of Amendment will then be issued to amend the directors or members of the company.
Do I need an Employer Identification Number (EIN)?
Only if the new owner of the business wants to start over, forming a new corporate entity with your assets, will an EIN be required. The new owner must use their Social Security Number to apply for an EIN through the Internal Revenue Service.
How do I close the sale of the business?
To transfer business ownership and formally close the deal, you should 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.