All businesses, no matter their size, face changes during their lifespans. So, it’s important that, as a business owner, you effectively handle such change to keep any negative impact on your company’s success minimal. Planning is key to keeping operations running smoothly, and every business owner should have a plan that outlines what will happen if transferring business ownership becomes necessary at some point.
For example, perhaps your partner decides to retire and offers to sell you his or her half of the business. Or maybe you decide to bring in a new partner to take over your former partner’s half. Perhaps you’re creating a succession plan for what happens to your business after you retire or pass on. No matter the scenario, it’s important to prepare now to ensure your firm’s continued success.
Here, we’ll break down scenarios for various business entities.
Scenario 1: Corporation
Example: You’ve owned your accounting firm for over 40 years, and now you want to retire. Your business is a corporation, and you’re selling it to a new owner, which will give them 100 percent ownership. What are the steps?
- First, you need to determine the state regulations to document the change in ownership. If the state didn’t record any names as the directors in the Articles of Incorporation, you can report this yourself in your annual report. If names were recorded, you need to file a Certificate of Amendment, so the state can change the recorded names in their system.
- Second, put a new shareholder agreement in place to specify the transfer of shares of stock to the new owner. Issue these shares of stock to the new owner.
- Finally, keep an organized corporate kit and include all of the documented changes.
Scenario 2: LLC
Example: Your accounting business is registered as an LLC, and you’ve decided to bring in a new partner so that you can expand your business. Your partner will now own a 30 percent stake in the company for a $10,000 investment.
- First, determine the state regulations to document change in ownership. This step is similar to the step in the first scenario.
- Second, update the operating agreement and any other internal documents that refer to ownership and management. Revise the copy for these to include the details of your partner’s investment amount and percentage of ownership. As an added measure, have the operating agreement notarized once you’ve updated it.
- Finally, issue a membership certificate to your new partner, including the percentage of ownership.
Scenario 3: Sole Proprietorship
Example: You’re the sole owner of your firm. You technically can’t sell your business, as a sole proprietorship is essentially a collection of assets. Instead, you can sell its assets (and perhaps liabilities). You want to retire and find someone who can purchase your office equipment, firm name, and customer list.
- First, determine if there are any state filings needed. Usually, there aren’t, but it may vary depending upon the state.
- Second, create a sales contract, showing the amount the new owner will pay for each asset and liability. Determine each asset’s value through its book value and any attached intangible assets.
- Finally, sell your business assets. Your business will dissolve, and the new owner can use the assets in any new type of structure.
Scenario 4: Partnership
Example: You, Joe, and Jane all have equal partnerships in your accounting firm. However, Joe is retiring and will contribute his share equally to you and Jane, as per the operating agreement. This will leave you and Jane with 50-50 split in the business, unless you bring on a new partner.
- First, determine the state regulations on partnership registration. It varies by state, so you may have to file forms to declare a change in ownership.
- Second, modify your firm’s operating agreement to update the number of shares and stake you and Jane now both hold. Check if there is a buy-sell agreement that governs the change of ownership.
- Finally, use established methods (interim closing or proration method) to allocate year-to-date income and loss on the day of the transfer.
Transferring of ownership can be tricky, so we’ve answered some frequently asked questions to help ease the process. However, it’s best to invest in legal counsel to avoid errors and ensure due diligence when dealing with a transfer of business ownership.
What if my business elected to become an “S” corporation?
Even if your business is an “S” corporation, the same steps taken in the corporation scenario apply. However, there are shareholder restrictions with “S” corporations. For example, there may not be more than 100 shareholders for “S” corporations.
Will I need a new Employer Identification Number (EIN) if ownership changes?
Yes, but only if a new entity has been created. Let’s say a new owner decides to start a new corporation for your existing business. The new owner would need a new EIN. The new owner also needs to use his or her personal Social Security Number (SSN) if yours or another partner’s was used for the original EIN.
What happens if I pass away?
It varies depending on the type of company:
Corporations are perpetual, which means the business lives on if you pass on. A succession plan or an estate should be in place to address what you want done with your firm after you pass. Hire an estate planning attorney to help you map out the plan. If you want to transfer ownership to a family member, you should include this in your estate plan. Along with this, follow the rest of the steps in the corporation scenario.
LLCs and sole proprietorships, however, are not perpetual. Should you pass one, your firm would dissolve or liquidate. This is why it’s important to have a contingency plan in place to counteract automatic dissolution. For example, you can choose to have the business be sold to a third party or you can transfer it to your heirs.
Partnerships depend on the agreement you made upon establishing the firm. With the agreement, you usually can choose from a myriad of options on what to do if a partner passes on. If you did not sign an agreement, the Partnership Act in your state will apply to regulate what happens to your business (usually, it will be dissolved immediately).
Have you ever transferred business ownership? Or are you in the process of doing so? If so, please share your experiences in the Comments section below.
DISCLAIMER: This article does not constitute professional legal advice; it is only intended to be informational and build awareness about possible scenarios for transferring business ownership. Individual legal circumstances may vary. Please talk with your lawyer or other professional adviser for more information and assistance.