Are you wondering how to transfer ownership of a small family business? These four steps will outline what is needed before a company can change hands from one owner to the next.
For many entrepreneurs, owning and operating a business is the ultimate dream. All companies, regardless of size or success, will eventually close, be sold, or given to someone else to run. This happens for many reasons and usually aligns with the original owner’s plans for the company.
Retirement, selling part or all of the company, and inviting new partners or shareholders are some reasons entrepreneurs will want to reorganize their business ownership. How you choose to transfer ownership will depend on your business structure and circumstances.
Let’s explore the essentials of how to transfer business ownership. From deciding how to do it to performing due diligence on the details—here are four steps to think about as you go.
#1: Decide on the Reason for Transfer
The reason to invoke a transfer of ownership will affect the route taken to get it done. There are several ways to transfer the company and the accompanying online business. Review these options and pick the one that aligns with your reasoning.
Gift it to a family member
A small business owner approaching retirement age might want to gradually relinquish control of the company to a chosen family member. In this instance, the choice would be to gift, sell in part, or sell the entire company to them in one go. Here, let’s assume the company is a gift.
There is gift tax to consider, but there is a government tax exemption in place of up to $10 million for small companies. Instead of paying taxes on a gift, you could give the whole company away as long as it’s worth less than the proposed $10 million.
Selling the business
When selling the legal entity (either privately or publicly), the use of a business broker will come in handy. For a private sale, there is cash and financing for interested parties—or an owner-financing sale, which has the interested buyer using installments and a finance period to buy the company.
For an incorporated small business (and online store) that turns a profit, there are also two ways to sell. These involve the sale of assets or the sale of company shares. An accountant or broker will help you determine which method would be most profitable for your structure.
Adding a partner
Handing things over to a partner means reviewing and redrafting the company operating agreements. The new partner will agree on what cash to pay for their ownership interest in the company, seeing as it is a private business—usually a sole proprietorship or existing partnership.
Consider closing the company altogether if it can’t be handed over or sold. In this case, the right paperwork will have to be filed with the state. A certificate of dissolution is typical for an incorporated company. Review the IRS business closing checklist to end tax liability for the company.
#2: Know How the Business Structure Is Impacted
With any transfer of business ownership, there will be implications for different legal entity types. Find your business structure below to see how the transfer will impact it.
- A limited liability company (LLC): Transferring this business entity is quite simple for an individual business owner and their partners. Documentation must be reviewed and updated in accordance with the change. Member withdrawal, taxes, interest, and voting rights are a few matters to update if only one owner is leaving—in which case, the others will have the opportunity to buy their ownership stake from them.
- A corporation: This structure makes transfer and sale easy. Any number of new shareholders can purchase ownership in the company. Depending on the way the business is incorporated, the shares offered can be common or preferred. An owner can choose to sell their common or preferred stock in accordance with the company’s capital structure.
- A sole proprietorship: In this structure, there is only one owner—you. This is a little problematic because much of the business value is linked to you as the owner. In this instance, it’s best to dissolve the company and sell off the assets piece by piece or at once to a single buyer. These can include patents, trademarks, domain names, a website, equipment, and leftover inventory.
- A partnership: Transferring a business when two or more partners are involved is straightforward—depending on the percentage of ownership. Interest must be relinquished for a new partner to come on board or an existing partner to take over.
The legal entity of a business also matters when transferring ownership of an asset like an online shop. These are typically classified as intangible assets and have varying value.
#3: Ask Your Lawyer for Assistance
Business ownership transfers usually have specific deadlines, and there is a significant amount of paperwork that must be filed by the required dates. Hiring a lawyer and getting them to assist with the business ownership transfer is a good idea.
A lawyer will give you counsel on how the legal entity can shift ownership so that everything is done correctly and the new owner has full control by the end of the process. If there are multiple partners in the company, having a lawyer present during transfer discussions is wise.
Mostly, they will help with the changes that need to be made to essential business documents. This may involve name changes, cancellation of trademarks, or the transfer of assets and liabilities. Make sure that the eCommerce side of the company is valued correctly and added to the sale.
Your eCommerce business will improve the value and drive up the asking price of the company. A functional income-generating website can be a big selling point.
#4: Additional State Checks and Introductions
When the company was formed, papers were filed with the state. In the same way, papers must be filed when ownership changes hands. Transfer business ownership to a family member, for example, and the details impacting the legal status of the company must be updated with state authorities.
If you applied for the company tax number using your social security number—the new owner would have to reapply using their social security number instead. A small business will have a list of vendors and suppliers needing to be introduced to the new owner before the transfer is complete.
Transfer Business Name To New Owner
Extra care should be taken to transfer the company’s business name and online store to the new owner. The right eCommerce platform makes this process quick and easy. Notify the web host and allow them to make the changes required. They will update the official records for you.
The transfer of business ownership is best done with a lawyer, a business broker, and a web team on your side. There are affordable ways to secure these services without contacting individuals that have expensive retainers.
Consider using a cloud-based platform that performs these business services for you to complete the transfer successfully. The end of one business may be the start of another!