How to Transfer Business Ownership

If you’re considering retiring, looking for a new venture, or bringing a partner into your business, you may be wondering about the process of transferring business ownership.

There are various ways to sell part or all of a business, and regulations you’ll need to adhere to as you move forward. Hopefully, you have instructions for the process outlined in the Bylaws or Shareholder’s Agreement created for your Corporation, or in the Operating Agreement of your Limited Liability Company (LLC). Whether your business is a Sole Proprietorship, Partnership, LLC, or Corporation, take care to follow the steps necessary for conveying ownership to another party in order to make sure the process is successful and to assure compliance.

In this article, you’ll learn what you need to know about handing over ownership of your business, whether it be to a family member, an employee, business partner, or another business. While requirements for selling a business can vary depending on your state and the type of business you have, some steps for changing ownership generally apply in all cases. Let’s start by looking at those steps, and then we’ll get into some specifics based on the type of business entity involved.

Eight Steps for Transferring Business Ownership

Changing how your business is owned is a process you’ll need to navigate carefully, as it involves considerable planning and decision making. While these steps may not apply in every case to every company, they provide a blueprint that allows you to determine what you’ll need to consider.

1. Confirm your decision. Before you embark on the process of changing the ownership of your business, review your reasons for doing so and confirm that you’re ready to proceed. Consider the timing of your decision, current market conditions, personal circumstances contributing to the decision, your financial situation, and other factors. Once you’ve established that your decision to sell part or all of your business is sound, you’re ready to move on.
2. Conduct a business valuation. A business valuation considers numerous factors to establish the current worth of a company. This not only helps you understand the value of your enterprise but provides a base on which to start sales negotiations, if applicable. There are different approaches to assessing the value of a business, including an asset-based approach, an earning value approach, and a market value approach. While it is possible to conduct your own business valuation, doing so requires a level of expertise and experience. Unless you are trained in the process, the best way to get a fair and accurate valuation may be to hire an experienced business valuator.
3. Identify, vet, and choose a successor. Once you’ve confirmed there are one or more parties interested in acquiring your business, think about their qualifications and ability to keep the company healthy and growing. Take time to discuss any plans they have for the business, assess their financial situation, review experience and performance, and consider other factors that might affect their ability to be successful. Once you’ve chosen a successor for your business, you can move forward with the process.
4. Formulate a plan for changing ownership. This is an important step, as it provides a detailed plan for how ownership will be handed from one party to another. You’ll first need to determine the best arrangement for facilitating the ownership change, such as selling the business to an outside party, selling your ownership interests to a co-owner or co-owners, working out a sales arrangement with an employee, gifting the company to a family member, merging with another company, or leasing the business. There are advantages and disadvantages to each of these methods, and which you should use depends somewhat on the type of business entity you have.
5. Prepare and finalize the transfer agreement. This document will lay out the process for conveying ownership of your business. It should include a list of all assets involved, including physical, financial, and intangible. It also should list any liabilities that come with the sale, such as any outstanding taxes or loans. The agreement will establish the purchase price of the business, the rights and responsibilities of each party involved, and other terms and conditions of the transaction. This agreement is a hugely important document, meaning you’ll want to be certain it’s properly drawn up and executed. You can download templates and create your own agreement, but I’d highly recommend that you seek professional help.
6. Execute the process by confirming that all legal and financial arrangements are sound. Making sure you are in compliance with all requirements; signing all applicable contracts; conveying the assets; updating business documents such as licenses, permits, and registrations; and performing all other necessary tasks.
7. Notify all stakeholders about the change in ownership to help avoid confusion and assure a smooth transition. Stakeholders include employees, customers, suppliers, applicable regulatory bodies, financial institutions, and anyone else who may be affected by the change.
8. Continue to work with the new owner. It often is helpful to schedule a transition period, during which the previous owner or owners work with the new owner to facilitate a smooth handover. Considerations such as operational responsibilities, communication channels, tax implications, and others can be addressed during this period.

How Your Entity Type Impacts the Change in Ownership

While the eight steps listed above broadly apply to all types of business entities, whether your company is a Sole Proprietorship, Partnership, LLC, or Corporation can impact the requirements and process for changing ownership. Let’s take a closer look at what might apply to your business structure.

Transferring a Sole Proprietorship

Because a Sole Proprietorship and its owner are not considered to be separate from one another, only the assets of this type of business entity can be sold – not the business itself. Prior to the sale of assets, the owner of the Sole Proprietorship should assess their value and make a list of what is to be sold.

There may be tangible assets, such as inventory, office supplies, equipment, furniture, or real estate, or intangible assets such as client lists, a business name, contracts, or intellectual property. There may be different rules for transferring a DBA (doing business as), ongoing contracts, and other assets, so you’ll need to do some homework by contacting the agencies or individuals involved.

The IRS will consider the sale of each asset as a separate deal and employ different tax rules depending on the types of assets you sell. Your inventory, for instance, is considered a different class of assets than vehicles or manufacturing equipment. You’ll have to consider the purchase price, sale price, and IRS rules when calculating whether the sale of each item results in a gain or loss for tax purposes.

When you’ve determined which assets you’ll sell and put a price on them, you can draw up an agreement yourself, or consult a professional to do that for you. Include the method of payment, and any other factors related to the sale. Be sure that all your financial records are up to date before proceeding with the sale of assets. Once the assets are sold, the Sole Proprietorship dissolves.

Transferring a Partnership

How business ownership gets transferred within a Partnership depends on the wishes of each person and the terms of the business’ Partnership Agreement. If a business has four partners and one wants to get out, ownership of that person’s share of the business can be relayed to the remaining partners. Or the departing partner may be able to sell their ownership shares to a new partner, depending on the terms of the agreement. Often, the remaining partners will have the right to approve or reject a new partner.

Your Partnership Agreement should note each partner’s share of the company, and hopefully addresses issues such as how each partner’s ownership stake is valued, rights of first refusal, grounds for leaving the Partnership, and procedures that must be followed for the sale. Follow the terms of the agreement, which may call for a buyout process where the remaining partners pay the person leaving for their share of the business.

If all partners agree to sell the entire business, you’ll have to address how debts will be settled, how assets will be valued and sold, and how sale proceeds will be distributed – all issues that should be addressed in your Partnership Agreement. If your agreement doesn’t address transfer of ownership, state law will dictate the terms.

Transferring an LLC

Just as with a Partnership Agreement, an LLC’s Operating Agreement should contain guidelines regarding an LLC’s change of ownership. Even though an Operating Agreement is not required by law, it’s an essential document that provides a road map for issues including how the business will be set up, the responsibilities and rights of members, how the LLC will be taxed, how capital contributions are handled, and how membership withdrawals and transfer provisions are handled. If there is no Operating Agreement, state rules will apply.

Many LLCs include a buy-sell agreement in their Operating Agreement that outlines conditions for selling shares of the business. It may state what events can trigger a sale – usually a death, retirement, bankruptcy, disability, divorce, or other event, who is eligible to purchase membership interests, how the value of membership interests is determined, how the sale will be funded, and address other issues.

If you don’t have an Operating Agreement that addresses the sale of LLC ownership, you’ll need to, in accordance with the laws of your state, draft an agreement for the sale of some or all of the interests of the LLC. LLC members will have to negotiate with a buyer or buyers and come to an agreement regarding details of the sale, including such matters as what is included in the sale, the price, how payments will be made, and other issues.

An LLC can move a portion of ownership, meaning that one or more members would sell their ownership interests while the remaining members would retain their interests. Or all members could decide to sell their ownership interests – essentially giving ownership of the entire LLC to a new owner or owners.

Regardless of whether you’re selling a portion of the LLC or the entire business, you must inform the Secretary of State where your LLC is based, along with your financial institutions and the IRS. You’ll have to amend the Articles of Organization you filed with the state when the LLC was formed, and you may need to issue a new membership certificate to the new owner or owners. Your bank will require you to update the list of people permitted to make transactions on behalf of the LLC, and the IRS may have you file a form regarding the responsible party for the business. You also should inform your registered agent of the change in ownership.

Transferring a Corporation

Ownership within a C Corporation or S Corporation is based on the percentage of shares owned, meaning an owner can sell or gift shares to modify their ownership of the business. A member of a Corporation who wants to sell all or some of their ownership will need to follow procedures established within the Corporate Bylaws, in addition to state laws pertaining to corporate entities.

A change of ownership normally must be approved by either the Board of Directors or shareholders, depending on corporate policies and state law. Selling shares in a corporation could result in capital gains tax or other financial considerations, so it’s a good idea to consult with your accountant or a tax attorney.

If the Corporation is being sold in its entirety to another company that will own 100% of the shares, all stock must be handed over to the new owner. Changes of officers and board members will need to be updated with your state, either by filing Articles of Amendment or noting the changes in your annual report. Again, your Corporate Bylaws should contain guidelines for these practices.

Once you’ve decided on compensation for the stock to be sold, you’ll need to document the sale with a stock transfer contract. Once the stock has been handed over and all requirements met, the transfer of ownership will be complete. You’ll need to consider potential tax liabilities and other financial considerations pertaining to Corporations that may become apparent during the sale.

How to Keep Things Operating Smoothly

Shifting business ownership is not a process that should be taken lightly, as you’ve got to maintain legal compliance while making sure you’re acting in the best financial interests of yourself and the business. Effective communication with all stakeholders is also an important part of the process.

Hopefully, this topic is thoroughly covered in your company documents, providing the guidelines you need to undertake and complete the process successfully.

If you are uncertain about how to go forward, I would highly recommend that you contact an experienced professional to guide you through what can be a challenging process. Someone experienced in this area can help assure that all documents and contracts meet local, state, and federal requirements, minimizing the possibility of legal complications down the road.