How to Transfer Business Ownership

When you’re ready to transfer business ownership, you have a few options. You can sell, gift, lease-purchase, or reassign your ownership interest. As your plans or life circumstances change, you might need to give someone else full or partial control of your business. That’s why it’s important to understand the legal steps involved. In this article, we’ll walk you through the process so you can transfer ownership smoothly and keep your business in good hands.

Table of Contents

• Ways to Change Business Ownership
• Transfer a Limited Liability Company
• Transfer a Sole Proprietorship
• Transfer a Corporation
• Transfer a Partnership
• Create a Transfer Agreement
• Frequently Asked Questions

Ways to Change Business Ownership

The most common methods to transfer business ownership include selling, restructuring, lease-purchasing, and gifting. Each option has unique benefits and processes.

Once you’re ready to transfer business ownership, you can use Legal Templates’s customizable business purchase agreement template. Our tools offer lawyer-approved templates designed to help with all your business needs.

Here are four ways business owners typically transfer ownership, each requiring different action steps and paperwork.

1. Sell the Business

Selling your business is the most common way to transfer ownership. You can do this in two ways:

• Cash Financing: After agreeing on a valuation for your business, the buyer will buy your company upfront using capital savings or a loan.
• Owner-financing Sale: The buyer will purchase your company over time by paying installments.

Selling a business requires a few essential steps, such as:

1. Appraisal: Have the business and all connected assets appraised to determine the fair market value and set a price for the sale.
2. Organization: Organize financial and business documents to show the buyer profitability and financials.
3. Negotiation: Negotiate the terms, price, and payment methods for the sale of the business.
4. Recording: Record the sale with a business purchase agreement and create a bill of sale to establish new ownership.

2. Add New Partners or Reapportion Ownership

If you own a partnership or an LLC, you can transfer primary ownership by adding new partners or members who will pay for their ownership interests. After they buy the majority of your ownership interest, they will become the new owners of your company.

If you don’t want to add new partners or members, you can reapportion ownership by getting your partners to buy full or partial ownership from you. The reapportioning process looks different depending on your business and preferences. Some common steps you can follow include:

1. Reading the agreement: The business agreement may give existing members purchasing priority, and some prohibit selling to new owners.
2. Selling ownership interest: Negotiate and sell your ownership interest according to the conditions in the agreement.
3. Documenting changes: To reflect the new ownership structure, add documentation, such as a new operating agreement, and include all the key facts of the transfer.

3. Lease-Purchase

Lease-purchase is an excellent way of transferring business ownership to attract as many buyers as possible. Entering a lease-purchase agreement is an attractive and safe choice for many buyers since the lessee only pays for company ownership for the duration of the lease.

Transfer business ownership through a lease-purchase with the following steps:

1. Ask for a letter of intent: Potential lessees may send a letter of intent expressing interest and offers.
2. Collect a good-faith deposit: Ask for a good-faith deposit to demonstrate the buyer’s ability to make payments and commitments.
3. Decide on the next steps: At the end of the lease period, the lessee can renew, purchase, or terminate the agreement

4. Gifting or Bequeathing

Gifting or bequeathing ownership stake to a relative or friend is a popular strategy for business owners, especially for passing on their legacy to their children.

Instead of bequeathing business ownership through a will (which only activates upon death), many business owners gift their ownership over time. This allows for a gradual transition and a smoother management handover. Moreover, this approach allows the owner to minimize gift taxes, as individuals can gift tax-free up to the annual exclusion threshold ($18,000 as of tax year 2024 [1] ).

Additionally, gifting partial business interests may qualify for valuation discounts. Trusts, such as revocable or irrevocable trusts (like GRATs or GRUTs), provide flexibility, income, and tax-efficient options when gifting business ownership.

Transfer ownership through gifting with the following steps:

1. Get an assessment: Have your business evaluated to ensure proper taxes, growth potential, and gifting regulations.
2. Add terms: Consider adding contingencies, conditions, or directives for the new owner.
3. Create documentation: Document your gifting with forms such as a gift deed or an assignment of partnership interest.

Transfer a Limited Liability Company

Transferring LLC ownership can prove more difficult as multiple owners, accounts, and associations are involved. However, you can use these steps to simplify the process and ensure compliance:

1. Review the documents: For guidelines about how to transfer business ownership, look at your articles of organization, operating agreement, buy-sell agreement, and state laws.
2. Negotiate the terms: Determine the timeline, permissions, and business assets included in the sale.
3. Record the transfer: Create a business bill of sale to notify other LLC members and record the changes with the IRS and any financial institutions where the LLC is registered.

Transfer a Sole Proprietorship

Unlike an LLC or corporation, a sole proprietorship is an extension of its owner. Consequently, you can’t sell a sole proprietorship, although you can sell its assets. After you sell your assets, the sole proprietorship will dissolve, and the buyer can use the assets however they’d like. The steps to transfer a sole proprietorship include:

1. Performing business valuation: Get an appraisal of the company’s entire value and make an itemized list of each asset’s value.
2. Writing a sales contract: Create an asset purchase agreement with relevant details about what specific assets the buyer wants to acquire and the conditions of the sale.
3. Checking state regulations: A sole proprietorship may not require registering with the state, but you may need to notify the state of the transfer.
4. Dissolving your company: Close your business accounts, end any associations, and release your business license to dissolve your stake and give the new owner control.

Transfer a Corporation

Ownership is based on the percentage of shares owned for S and C corporations. Transferring ownership can be done by selling, gifting, or bequeathing shares. The following steps ensure proper transfer of ownership for a corporation:

1. Read the shareholder agreement: Refer to the shareholder agreement for ownership transfer requirements.
2. Receive approval: Gather approval from owners, shareholders, or the board of directors.
3. Work with a tax advisor: Get advice to determine the timing and structure of your sale to get the most value from the transfer.

Transfer a Partnership

A partnership involves two or more owners. Unless your partners also want to transfer or sell the entire business, you’ll likely want to relinquish ownership. Here are the steps for ownership transfer in a partnership:

1. Check agreements: Look at your partnership agreement to see each partner’s company share.
2. Transfer or sell: You can reapportion ownership to existing partners or use an assignment of partnership interest to sell to a new partner.
3. Update documents: Amend your partnership agreement to reflect the changes.
4. File tax forms: File tax forms, such as Schedule K-1 and Form 1065, to show the details of the ownership change or partnership termination.

Create a Transfer Agreement

Creating a transfer business ownership agreement is a crucial step regardless of how you plan to change ownership. You can use Legal Templates’ library of forms to ensure you have binding and compliant terms. Completing this step secures your transfer and helps create a smooth transition for your business.

Whether you’re ready to give up your business ownership or simply curious about the process, our business purchase agreement template provides the information, processes, and protections needed.

Frequently Asked Questions