How to Transfer Business Ownership
The steps to transfer ownership of your business depend on its structure and assets. This guide explains how to transfer various types of businesses and the legal and financial factors to consider when selling, gifting or leasing a business.
How to transfer a sole proprietorship
In a sole proprietorship, you’re the only business owner, and there’s no legal separation between you and the business. As a result, you can’t sell the company 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 company.
- Contracts: Any ongoing contractual obligations.
- Property: Any equipment, furniture, inventory or buildings you own.
- Client list: This includes contact information, such as clients’ email addresses and phone numbers.
Remember 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 |
|---|
|
How to transfer a partnership
A business partnership is an unincorporated 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 |
|---|
|
How to change ownership percentages
Changing ownership percentage requires careful planning and agreement among stakeholders. Here are a few tips to help the process go smoothly.
- Check your existing partnership or shareholder agreement for any restrictions or procedures for changing ownership.
- Work with an Accredited Business Valuation (ABV) professional to get a complete and accurate business valuation.
- Consult a tax professional, such as a Certified Public Accountant (CPA) or an Enrolled Agent (EA), to understand the tax consequences of changing ownership percentages. You may owe capital gains taxes on the transfer.
- An attorney can help ensure you comply with federal, state and local requirements during transfer.
How to transfer an LLC
A Limited Liability Company (LLC) is a business structure allowed by state law. It can have one or more owners, usually referred to as “members.” Selling an LLC is a bit more complicated, so consult with an attorney familiar with your state’s rules beforehand.
| Steps to sell your LLC |
|---|
|
How to transfer an 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:
- Cannot have more than 100 shareholders
- Has only one class of stock
- Doesn’t pay federal income taxes directly but instead passes income and losses through to shareholders to pay taxes on their personal tax returns
With both types, a shareholder agreement or corporate bylaws should have detailed guidelines for selling, gifting or bequeathing shares to new owners, making this process fairly easy.
| Steps to sell your corporation |
|---|
|
How to lease your business
If you don’t need cash up front, you can also consider offering lease-to-own, which allows you to sell to someone without the capital to buy the business outright by temporarily leasing the entire business and its responsibilities to them. These contracts often allow the new business owner to buy the business outright, extend the lease or return control to you at the end of the lease term.
If you go this route, steps will likely include:
- Setting lease terms. Negotiate with the lessee to agree on rent, maintenance and operational responsibilities.
- Drafting a lease agreement. Work with an attorney to create a lease agreement outlining terms, responsibilities and the duration of the lease. Make sure you address who is responsible for carrying insurance to protect both parties from potential liabilities.
- Reviewing finances. Assess the financial stability of the potential lessee to ensure they can meet the lease obligations.
- Creating operational guidelines. Provide detailed operational guidelines to help the lessee maintain business standards and quality.
- Hiring a lawyer. Leasing a business is complicated, and we’ve only just touched on the steps needed. Work with an attorney who is experienced in lease-to-own contracts to make sure your business and your finances are protected.
4 steps to take before selling your business
Taking some time to plan and get your business finances in order before a sale can maximize value and ensure a smooth transition.
- Appraise your business. Get a professional valuation to determine the business’s market worth. You can find a qualified appraiser through the American Society of Appraisers or the National Association of Certified Valuation Analysts.
- Organize your finances. Update your accounting and organize all financial records, including balance sheets, income statements, and tax returns. Buyers may ask to review these records during the due diligence process.
- Improve business performance. Address any operational issues and improve business performance to make it more attractive to buyers.
- Ensure legal compliance. Ensure all of your business permits and licenses are up to date.
What happens to loans when I sell my business?
When you sell your business, you must address active loans, lines of credit or invoice factoring contracts. Typically, the buyer assumes responsibility for any existing small business loans, but you must clearly state this in the sale agreement. In some cases, you may need to settle these debts before the sale or use proceeds from the sale to pay off the debt.
Blanket liens on existing loans can complicate the sale process. These liens give lenders a claim on all business assets, restricting your ability to transfer ownership. You’ll need to negotiate with lenders to release or transfer these liens to the buyer. Consult your attorney or financial advisor to address all financial obligations and avoid delays or potential legal issues.
What to know before gifting a business
Before gifting ownership of a business to a family member or other loved one, consider the recipient’s ability to manage the business. Ensure they have the necessary skills and resources to take over operations. After the transfer, update all legal documents, including ownership records and contracts, to reflect the new ownership.
Remember, gifting a business interest can have tax implications. You may need to file a federal gift tax return and pay gift taxes on the transfer. Consider gifting a small stake in the business over time to take advantage of the annual gift tax exemption, which allows you to gift up to $18,000 per person in 2024 without filing a gift tax return or paying any gift tax. Consult with a tax professional to ensure you know what to expect.
Transferring business ownership to a family member
To transfer ownership of a business to a family member, start by deciding on the transfer method, such as a gift, sale or inheritance. Each method has different legal and tax implications.
If you decide to sell the business, make sure you set a sales price that reflects its market value. Selling any asset to a related party for less than market value can draw scrutiny from the IRS and raise potential gift tax issues.
Consider estate planning strategies like setting up a family limited partnership or trust to facilitate the transfer and minimize the tax burden. These transfers can be complicated, so it’s a good idea to involve your estate planning attorney and tax advisor.
Tips for a smooth transition
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:
- Notify customers, vendors, suppliers, employees and independent contractors that the business is being restructured or sold.
- Consider staying on at the business after the sale as an employee, board member or consultant to provide the new owner with institutional knowledge.
- Transfer the business name to the new owner.
- Contact your business bank account regarding steps for transferring or closing down your business’s accounts.
- Consider transferring your business’s social media accounts to the new owner.
Frequently asked questions
It depends on the type of business you own. For a sole proprietorship or single-member LLC, you don’t need 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, a multiple-member LLC is more complicated since you have to follow the rules outlined in the operating agreement and Articles of Organization.
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. You’ll want to close your business account with the IRS.
There are a few exceptions to this rule, such as a company merger where the main corporation retains their original EIN. Changing ownership of an S-corporation will also not require a new EIN.
This depends on the structure of your business. A sole proprietorship can’t continue without you, but the assets can be sold or distributed according to your will or your state’s probate laws. Your partnership or 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 single-member LLCs, the outcome will be similar to that of a sole proprietorship. With corporations, the ownership transfers to your estate 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.