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How to Transfer Business Ownership

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There are many reasons you may decide to change or transfer business ownership. Perhaps you want to add a new partner, pursue another entrepreneurial idea, pass the company onto a family member or prepare for retirement.

Whatever the reason, this guide explains how to transfer business ownership. We’ll explain how your business’s structure will affect how to change ownership and discuss the different methods for transferring a business, along with legal and financial ramifications.

How to transfer business ownership by type of business

Knowing the different types of business entities can help determine how to transfer your business from one person to another. You may even decide it’s best to change your business’s structure now in order to prepare for a business sale down the road.

The main business types of business structures are:

  • Sole proprietorship
  • Partnerships
  • LLC
  • Incorporation

Sole proprietorship

A sole proprietorship can only have one owner. The core of the business is tied to you and your legal name. Therefore, you can’t sell the business in its entirety.

However, you can sell part or all of the business’s assets, which can include the following:

  • The business’s name: Often referred to as “doing business as” (DBA), this is the name associated with your business.
  • Contracts: Any ongoing contractual obligations.
  • Property: Any leases, rentals or buildings you own.
  • Client list: This includes contact information, such as clients’ email addresses and phone numbers.

Keep in mind that any remaining business debts or liabilities stay with you and can’t be passed onto the new owner.

Steps to sell your sole proprietorship
  1. Establish your business’s overall value, then create an itemized list of each asset’s price.
  2. Write up a sales contract detailing what the buyer is purchasing.
  3. Check whether state filings are required (usually not required with this type of transaction).
  4. Dissolve your company after the sale is complete. This will allow the new owner to recreate it with your sold assets.

Example

Sam runs a math tutoring business as a sole proprietorship. He wants to move overseas and has decided to sell his business. Although he can’t sell the entire business, he can sell his company’s name, collection of math workbooks, list of clients, company laptop and website’s domain name.

The total of his assets is valued at $40,000. Sam finds a buyer who agrees to pay $55,000. Together, Sam and the buyer write up a sales contract and finalize the agreement. Sam then dissolves his business and moves onto his next venture.

Partnerships

A business partnership refers to a company with two or more owners. You have several options when looking to change ownership of your partnership, such as adding or removing members, or tweaking each owner’s stake in the company.

However, if all of the business’s core partners change, you’ll need to officially dissolve the company. Similar to the sole proprietorship, you can’t sell the entire business, only its assets.

Steps to sell your partnership
  1. Hold a meeting with all the partners to vote on the issue at hand, such as selling the assets (and dissolving the partnership), or changing ownership percentages.
  2. Get a business valuation to determine the company’s value.
  3. Refer to the partnership agreement to understand how shares are split between partners (if you’re changing ownership percentages).
  4. File all necessary tax forms, such as Schedule K-1 and Form 1065, to show the details of the ownership transfer or partnership termination (varies from state to state).

Example

Let’s say that Sam has two partners named Joe and Lily. All three owners have equal shares in the math tutoring business. Sam decides to give up his entire stake in the business. According to the company’s partnership agreement, he’s required to disperse his 33.3% ownership between Joe and Lily, the two remaining partners.

Afterwards, the updated operating agreement will show the new ownership percentages. Depending on their state’s laws, Joe and Lily might have to declare ownership changes.

Limited liability company (LLC)

An LLC is a limited liability corporation and can have one or more owners, usually referred to as “members.” Selling an LLC is a bit more complicated, so consult with an attorney who’s familiar with your state’s rules beforehand.

Steps to sell your LLC
  1. Review the buy-sell details outlined in your LLC’s operating agreement and Articles of Organization.
  2. Receive permission from all members with an ownership stake to move forward. The members can choose to either sell their shares to the buyer or to another member in the organization, or to deny the transaction altogether.
  3. Get a business valuation to determine the company’s value if transferring your ownership to another LLC member (you’re usually not required to do a valuation when selling the full LLC). Keep in mind that your operating agreement may have restrictions on the business’s overall sell price.
  4. Write up a detailed bill of sale that outlines what the buyer is purchasing.
  5. File all required forms with the IRS — including Form 8822-B, for changing the LLC’s “Responsible Party.”
  6. Draft a new operating agreement and Certificate of Amendment, which will include the new or updated company members.

Example

Sam founded his math tutoring business as an LLC, along with co-owners, Joe and Lily. Now Sam wants to retire. According to the LLC’s operating agreement, he can sell his shares to Joe and Lily after receiving a business valuation. Or, if Joe and Lily want to leave the company too, they can agree to sell the entire business (or just the assets if their state has restrictions on this).

After the sale/transfer is complete, the new owners will write up a revised operating agreement, making sure to file all necessary paperwork with the state.

S-corporation or C-corporation

A business corporation can be classified as a C-corporation or an S-corporation. Ownership percentage is determined by the number of shares each owner holds; the main difference between these two kinds of corporations is that an S-Corp has 100 or less shareholders.

With both types, a shareholder agreement has detailed guidelines for selling, gifting or bequeathing shares to new owners, making this process fairly easy.

Steps to sell your corporation
  1. Read your company’s shareholder agreement to understand requirements for selling your shares.
  2. Receive approval from the other shareholders and/or the board of directors to transfer a portion or all of your shares.
  3. Contact an attorney and tax advisor for guidance on how to optimize the timing of the sale of your shares in order to maximize earnings and minimize tax liability.

Example

Sam is one of 10 shareholders for a franchised math-tutoring business, which is set up as an S-Corp. He now wants to sell his ownership shares. First, he refers to the company’s shareholder agreement, then discusses his plan with the other shareholders and board of directors.

After receiving their approval, Sam consults with an attorney and tax advisor to figure out the best plan for selling his shares in order to reduce his tax liability.

Methods to change business ownership

Once you’ve got a grasp of your business’s classification and any associated buy-sell limitations, you can explore several methods for moving forward.

How to change business ownership depends on your specific needs and long-term goals. It’s important to weigh out the pros and cons to ensure you’re making the best decision for your long-term goals. And remember, it’s best to consult a lawyer and accountant to make sure you follow all the required steps.

When transferring business ownership, there are four options to consider:

  1. Sell the business
  2. Change ownership percentages
  3. Lease the business
  4. Gift ownership

Depending on your specific situation, you may even decide to simply close your business, especially if you’re losing money and don’t have the time or resources to find a buyer.

Sell the business

If you’re ready to move on completely from your current business, here are some key factors to take into account.

  • Business valuation: Private businesses need to get a complete analysis of their company’s value, including all included assets. Once you receive this, ask yourself: Is now a good time to sell? Sometimes it’s worth waiting another year or two in order to maximize your profits.
  • Method of payment: Usually businesses can be purchased with cash or a small business loan. Sometimes a business owner will allow a seller-financed sale, which is where the seller collects payments plus interest directly from the buyer.
  • Legal reporting: Check with your state’s guidelines regarding tax forms and other legal obligations. You’ll want to avoid getting dinged by not following the correct steps.

Remember, the exact steps will vary based on the structure of your business. If in doubt, reach out to a tax advisor to help with the legal legwork.

Change ownership percentages

All types of business ownership can alter their ownership percentages at any time, except for the sole proprietorship.

Perhaps you want to bring on extra partners to lighten your overall workload. Or maybe you’re wanting to devote time to purchasing an existing business to expand your capital.

Whatever the case, make sure to follow your business’s guidelines for altering ownership percentages.

As mentioned above, each business entity approaches this type of change somewhat differently:

  • Partnership: The partnership agreement outlines any restrictions on changing or transferring ownership percentages. If it’s permitted, you can transfer profits, voting rights and other responsibilities.
  • LLC: The terms of ownership are governed by an official operating agreement and the articles of organization. If the operating agreement doesn’t include directions for changing ownership, you can refer to your state’s laws for how to proceed. In general, most ownership changes need to be approved by all members of the LLC.
  • Incorporations: Follow the company’s guidelines about selling or buying shares. Just ensure all required paperwork is filed at the end of the year to reflect the changes.

Lease the business

Another option to consider is to lease your business to a potential buyer. Basically, it’s a trial run to see if this is a long-term fit for both parties.

You can establish a lease-to-purchase agreement at the beginning, or wait until the lease period is up before moving forward with a traditional sale.

In the end, this method allows you the freedom to explore different career and entrepreneurial options without having to commit to giving up your business today. It also gives you time to find the perfect owner to replace you.

Gift ownership

There may come a time when you’re ready to hand the business over to a family member. You can choose to sell the business or its assets to a family member by following the steps outlined above, or you can “gift” it without any exchange of money.

Here are two options to consider:

  • Gift the business in small increments: This method is ideal if you’re wanting to pass the business onto a family member while you’re still alive. You can avoid hefty taxes by gifting a portion of the business over a span of years. Currently, the tax-free limit for 2022 is $16,000 per individual, with a lifetime maximum of $12.06 million.
  • Include the business in your will: You can transfer all or a portion of your business to one or multiple beneficiaries in your will, which will be executed upon your death. If the business’s total value is below $12.06 million, the exemption amount for 2022, your beneficiaries most likely won’t need to pay taxes on the inheritance.

Final steps before transferring business ownership

Once you’ve determined the type of transfer you’d like to complete, it’s important to review everything to double-check you haven’t missed a key step in the process.

Here are some final steps to help ensure a smooth transition for everyone involved:

  1. Notify customers, vendors, suppliers, employees and independent contracts that the business is being restructured or sold.
  2. Transfer the business name to the new owner.
  3. Contact your business bank account regarding steps for transferring or closing down your business’s accounts.
  4. Consider transferring your business’s social media accounts to the new owner.

Frequently asked questions

How hard is it to transfer my business to another person?

It depends on the type of business you own. For a sole proprietorship, you don’t need to get anyone’s permission or follow any partnership agreements to sell your business’s name and assets; this makes the overall process quick and easy. On the other hand, an LLC is more complicated since you have to follow the rules outlined in the operating agreement and Articles of Organization.

Can I transfer my business to a family member?

Yes. You can choose to sell, gift or bequeath your business to any family member.

Do I transfer my business’s EIN to the new owner?

The EIN, or employee identification number, is tied to the original business owner. Therefore, when you sell the business, the new owner has to apply for their own EIN.

There are a few exceptions to this rule, such as a company merger where the main corporation retains their original EIN. Changing ownership for an S-corporation will also not require a new EIN.

What happens to my business when I die?

This depends on the structure of your business. A sole proprietorship can’t continue on without you, but the assets can be sold or distributed according to your will or your state’s probate laws. Your LLC’s operating agreement should have guidelines for what happens if the owner dies, such as allowing the business to continue under the guidance of the surviving owners. For solo-owned LLC’s, the outcome will be similar to a sole proprietorship. With corporations, the ownership is transferred to your executor, and then most likely onto your heirs. Your family can then decide whether to keep or sell the business.

You also have the option of specifying your desires ahead of time in your last will and testament. For example, some business owners choose to have their business turned into a testamentary trust, which is a trust in your last will and testament. They elect a manager to oversee the business’s daily logistics, who then passes the proceeds onto the deceased owner’s beneficiaries.

 

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