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 whole — to someone else for myriad reasons.
For example, the venture may not generate the expected returns, and they may want to cut their losses by transferring business ownership to family members, friends, 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 your 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 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 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 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 ownership interest from you.
Partnerships and multi-member LLCs usually state in their agreements regarding how ownership can be transferred. Typically, existing members or owners have priority in purchasing ownership before potential new owners can be brought in. Some agreements prohibit ownership interests from being sold to new owners and require them to be either sold back to the company or to fellow members.
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.
The lessee usually prepares a letter of intent and a good-faith deposit to indicate a serious interest in the business. This initial step sets the stage for detailed research into the company, leading to a binding lease-purchase agreement with a defined purchase price.
Once the lease period ends, the lessee — now the buyer — can then decide whether to renew the lease, buy the company, or terminate the relationship.
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, allowing 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).
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 transfer options when gifting business ownership.
Gifting vs Bequeathing
A bequeath is property a person leaves to a beneficiary in their will following their death. A gift is given when someone is still alive.
How Your Business’s Structure Affects Transfers
Your company’s business structure determines how you can transfer business ownership. Each structure has its own steps and procedures.
Limited Liability Company
Transferring LLC ownership can be complex. While the process may vary by state, here’s the general process.
Step 1: Review the Documents
Look at your LLC’s articles of organization, operating agreement, and buy-sell agreement to see if there are any guidelines for selling the business. If these documents are silent on selling ownership, state laws apply.
Misunderstandings of the buy-sell agreement
A buy-sell agreement is NOT used to sell a business. Instead, the agreement stipulates what happens with the ownership of a company if something unforeseen occurs. Generally, it requires that ownership interests be either sold back to the company or to fellow members. It is typically drafted at set up or early in the business, and entirely new owners would not be part of the agreement.
Step 2: Negotiate Terms
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.
- 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 (unless stated otherwise in the operating agreement);
- Other relevant details about the sale of the LLC.
While a business purchase agreement outlines the terms of a business sale, it does not actually prove the transfer of the business or ownership.
Step 3: Transfer the Business
After you’ve determined what will be exchanged in this sale, write and sign a business bill of sale with the buyer to establish the transfer. State and local governments typically require a bill of sale as proof of ownership for transferring licenses, permits, and completing registrations. Without it, business ownership can be disputed.
Once you’ve completed the sale, notify your Secretary of State about the change in ownership to establish the transfer officially. 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.
Transferring business ownership of an LLC can have complex financial, tax, and legal obligations and requirements. In addition, the process and requirements vary by state. We highly recommend consulting an experienced business lawyer to help you manage the sale.
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.
Ownership is based on the percentage of shares owned for S and C corporations. This means transferring ownership of either type of corporation can be done by selling, gifting, or bequeathing shares.
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 transfer your S corporation incorrectly, it could jeopardize your election status.
If you’re looking to transfer all or part of your stock in a corporation, you may need 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 or sell the entire business, you’ll likely want to relinquish your ownership portion.
Below are the steps for ownership transfer in a partnership:
- Look at your business’ partnership agreement. This document lists each partner’s share of the company.
- If you are transferring ownership to existing partners, talk to them and see how you can reapportion your ownership interest to them.
If you are selling ownership to a new partner, use an assignment of partnership interest form to indicate the transfer.
- Transfer interests to other partners and amend the partnership agreement to reflect the transfer.
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?
One of the best options to transfer your business ownership to a family member is by gifting or bequeathing shares to them. You can do so tax-free if you annually bequeath $18,000 or less in value (as of tax year 2024).
How do I transfer ownership of a small family business?
It depends on the structure of the business.
If your small family business is a sole proprietorship, you can transfer business 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 by gifting, selling, or bequeathing shares.
If your business is an LLC, you need to:
- Examine your LLC’s foundational documents for any guidelines on selling the business. If none, state laws will apply.
- Discuss with the buyer what they intend to purchase, whether it’s assets or the entire LLC. Use the appropriate agreement to detail the sale’s terms, including timeline, assets involved, member consent, and other sale specifics. Note that this agreement doesn’t prove the transfer of ownership.
- Finalize the sale with a business bill of sale, required for transferring licenses and registrations. Notify the Secretary of State and other relevant parties like the IRS, financial institutions, and registered agents about the ownership change.
Can I 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.
How hard is it to transfer my business to another person?
It depends on your business structure. 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 abide by the agreed terms set out in the LLC operating agreement.
It’s important to understand that different types of transactions and business structures have different legal and financial ramifications. Generally, consulting with lawyers and accountants is essential to ensure all necessary steps are properly executed.
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.
In corporations, you can either pass on your shares to your heirs or have other shareholders buy your ownership interest. In the latter case, your estate gets paid for this interest without transferring any stock ownership. However, the specific process depends on the terms set in the shareholder agreement of the corporation.
You can outline what happens when you die in your last will and testament, such as having your business turned into a testamentary trust.
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