Many entrepreneurs launch a business with plans to own it for many years, possibly growing and expanding it into different areas. Others might find themselves looking to transfer business ownership — in part or in whole — to someone else for myriad reasons. The venture may not be generating the returns they anticipated, for example, and they may want to cut their losses by opting to transfer business ownership to family members, a friend, or another business owner.
Whether you’re the owner of a limited liability company, a corporation, or even a sole proprietorship, knowing how to transfer business ownership to someone else can be helpful, especially if you ever find yourself in a situation where you need to remove yourself from your venture without necessarily closing shop.
4 Ways To Transfer Business Ownership
When you already know who you’ll be transferring your company’s ownership to, the process generally begins by drawing up a transfer of business ownership agreement.
Here are four ways business ownership is typically transferred, with 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 and its assets, the buyer will buy your company upfront in cash using capital savings or a loan.
- Owner-financing sale: The buyer will purchase your company over time by paying installments.
2. Add New Partners or Reapportion Ownership
If you own a partnership or an LLC, you can transfer business ownership by adding new partners or members who will pay for their ownership interests. After they buy the majority of your share capital, 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 shares from you.
This is a great way of transferring business ownership if you want to attract as many buyers as possible. Entering a lease-purchase agreement is an attractive and safe choice for many buyers since the lessee is only paying for company ownership for the duration of the lease. Once the lease has expired, the lessee — now the buyer — can then decide whether to renew the lease, buy the company, or terminate the relationship.
4. Transfer the Business via Gifting or Bequeathing
You can transfer ownership by bequeathing or gifting it to a relative or friend. This transfer can be tax-free if you bequeath company shares of $16,000 or less annually.
How to Transfer Business Ownership Based on Business Structure
Your company’s corporate structure determines how you can transfer business ownership. Each structure has its own steps and procedures.
Limited Liability Company
Transferring ownership of an LLC can be complex. Here’s what you need to do.
Review your articles of organization and your operating agreement
Look at your LLC’s Articles of Organization and Operating Agreement to see if there are any guidelines for selling the business.
Write down what the purchaser wants to buy
Talk to the purchaser to determine what exactly they want to buy. Some buyers may only want to buy your assets, while others want to buy the entire LLC.
Write a letter of intent (LOI) to declare your intention to sell your LLC to the new owner(s).
Create a buy-sell agreement with the new purchaser
After you’ve determined what will be exchanged in this sale, write a buy-sell agreement that will establish all the key facts of the sale, including:
- The timeline of the sale
- The assets included in the sale
- What is being purchased (specific assets, for example, or the whole LLC)
- The agreement and consent of all members with ownership in the LLC
- Other relevant details about the sale of the LLC
Transferring business ownership of an LLC can have complex financial, tax, and legal obligations and requirements. We highly recommend consulting an experienced business lawyer to help you manage the sale and draft a solid buy-sell agreement.
Notify other parties about the sale
After you’ve completed the sale, notify your Secretary of State about the change in ownership. Consult your lawyer about how to do this.
You also need to notify other parties, including:
- The Internal Revenue Service (IRS)
- Financial institutions where your LLC has accounts
- Your LLC’s registered agent (the person or business that receives formal notices, documents, or letters for the LLC)
- States where your LLC has been registered
A sole proprietorship only has one owner — you. Unlike an LLC or corporation, a sole proprietorship is an extension of its owner. Consequently, you can’t really sell a sole proprietorship, although you can dispose of its assets. After you sell your assets, the sole proprietorship will dissolve, and the buyer can use the assets however they’d like.
For example, let’s say you run a successful marketing firm as a sole proprietorship. You want to retire and find someone to buy your computers, customer list, and company name. You determine that your assets are worth $50,000 and you find a buyer who is willing to pay $55,000. You and the buyer can then draft and execute a sales contract.
If your business is incorporated as an S or C Corporation, ownership is based on the percentage of shares owned. That means you can transfer ownership by selling, gifting, or bequeathing shares. Transferring ownership of both an S or C Corporation is the same.
Keep in mind that S corporations can’t have more than 100 shareholders, so a transfer of ownership will be prohibited if it creates more than 100 owners. If you do transfer your S corporation incorrectly, it could jeopardize your s election status.
If you’re looking to transfer all or part of your stock in a corporation, you might need to get approval from the board of directors and other shareholders. Following this, you should seek professional help from either an attorney or tax advisor to identify the best method and timing to offload your shares, which can maximize your sale price and minimize how much tax you pay.
You can find the requirements for selling your shares in the company’s shareholder agreement.
A partnership involves two or more owners. Unless your partner or partners are also looking to transfer ownership, you’ll likely be looking to relinquish your portion of ownership.
To transfer ownership in a partnership, you need to:
- Look at your business’ partnership agreement. This document lists out each partner’s share of the company.
- Talk to the partners and see how you can reapportion your shares to them. Write this down in the buy-sell agreement.
- Transfer interests to other partners and amend the partnership agreement to reflect the buy-sell agreement.
Depending on your jurisdiction, you may have to file forms with the state declaring ownership change.
Transfer Business Ownership FAQs
How do I transfer ownership of a business to a family member?
You can transfer ownership of your business to a family member by gifting or bequeathing shares to them. This can be done tax-free if you annually bequeath $16,000 or less in shares.
How do I transfer ownership of a small family business?
To transfer ownership of a small family business depends on the corporate structure of the business.
If your small family business is a sole proprietorship, you can transfer ownership by selling its assets. If it’s a partnership, you could transfer your interest to other partners. If it’s a corporation, you can transfer ownership by gifting, selling, or bequeathing shares.
If your business is an LLC, you need to:
- Follow the guidelines in your Articles of Organization and Operating Agreement guidelines.
- Establish what the purchaser wants to buy — do they want the whole LLC or just the assets?
- Create a buy-sell agreement that reflects the key facts of the sale.
- Notify other parties about the change of ownership.
Can you transfer an EIN to a new owner?
No, you generally can’t transfer an EIN to a new owner and will need to obtain a new EIN. You can learn more about getting a new EIN here.
How hard is it to transfer my business to another person?
How hard it is to transfer your business to another person depends on the type of business you own. A sole proprietorship, for example, doesn’t require permission from anyone else, making the process generally quick and easy. Selling an LLC on the other hand is more complicated as you have to obey the requirements set out in the LLC operating agreement and articles of incorporation.
What happens to my business when I die?
What happens to your business when you die depends on the structure of your business. An LLC will outline what happens if an owner dies in its operating agreement, such as allowing the business to continue operating under surviving members. A sole proprietorship on the other hand can’t continue without you, but the assets can be sold or distributed as stated in your will or your state’s probate laws. Single member LLCs would be similar to a sole proprietorship. With corporations, shareholder stock may be passed on to your heirs or the ownership interest may be bought out by other shareholders and then your estate is compensated for that ownership interest without taking any stock ownership for example. But it can vary depending on what is outlined in the stockholder agreement. You can outline what happens when you die in your last will and testament, such as having your business turned into a testamentary trust.