Transferring Your Business To A Partner or Family? Here’s How To Do It
What did one pumpkin businessman say to the other pumpkin? If you weren’t so sweet, we wouldn’t be in this jam!
In business, change is inevitable. As a business owner, you must be prepared to address change as new demands arise. Responding wisely to changing demands allows more adaptive businesses to flourish. A smart pivot can save struggling companies, create new growth opportunities, or be the discovery that allows for the dominance of an industry. In the fast pace of modern business, learning how to quickly adapt through a well-thought-out shift or sale is essential.
If a major life event comes up that prevents you from running your business as usual, or if you plan to retire soon, you need to be prepared to sell your company. When it comes time to transfer business ownership, think of the process as more of a life transformation than just a transaction. It’s not about cutting a deal, but also making a transition plan to guide you comfortably through the next phase in your life.
In this example, we’ll walk you through the process of transferring ownership the right way — without suffering from pumpkin’s remorse.
Questions to Ask
Once you’ve made the decision that you are going to transfer business ownership, you need to seriously consider four key questions. They are:
- What will I do next?
- Is there a gap?
- How much capital do I need?
- What do I really desire?
The first question is meant to ward off the feelings of regret that many business owners experience after selling off their company or their assets. Your business made up a large part of your life, so you must find replacements for the social and intellectual aspects of your life that will be thrown to the wayside after shedding ownership of your company.
Second, you need to find out — from a qualified professional — whether there’s a gap between what the market is willing to pay for your business and how much money you need.
This ties into the third question, which asks you how much money you need to live comfortably through your retirement or transition period.
Finally, do a little soul searching to find out what it is you want in life. Money is only one thing, but chances are you want more fulfillment than deep pockets. Write down what you desire after running a successful pumpkin business, and whether a transfer of business will help get you there.
Methods of Transferring Ownership
If you want to know how to change ownership of a business, your answer will depend on the kind of change you want to make. Technically speaking, there are a few ways to shed ownership of your pumpkin company aside from selling it outright.
Selling the Business
To sell a private business, you have two options: an owner-financing sale, or cash financing. In the former, the buyer will purchase the pumpkin company over time in the form of installments agreed upon in the transfer of business ownership form. For the latter, the buyer pays for the pumpkin company upfront in cash using a loan or liquid savings after agreeing upon valuation for the assets.
Adding New Pies aka Partners
Another method to transfer business ownership is to bring in new partners who will have to each pay for their ownership interests. Under this kind of arrangement, new shareholders buy into the pumpkin company, typically with cash, to transfer the majority of the share capital out of your hands.
Giving it to Another Pumpkin
Often we are asked how to transfer business ownership to a family member. A common method of relinquishing ownership of a business, especially for retirees, is to hand the pumpkin company to their son or daughter. Handing down the family business can be done tax-free if you gift shares of the company valued at $15,000 or less annually in regular installments.
For bold buyers, entering into a lease-purchase agreement is a safer choice. This is because the lessee is only entitled to the ownership of the pumpkin company through the duration of the lease, after which the buyer can decide whether to buy the company, renew the lease, or completely relinquish control.
Transferring Ownership: A Simple Walkthrough
Once you have decided to sell your pumpkin business, you need to take immediate action. To help you understand how to change ownership of a corporation, imagine the following scenario: you own a limited liability company (LLC) and decide to bring in a new partner who will own 33% of the pumpkin company for a price of $50,000.
1: Navigate Choppy Waters
Your first order of business is to explore the regulatory restrictions placed on the transaction under state law. In some jurisdictions, you must report all changes of ownership in your pumpkin business unless the state failed to record member names in the Certificate of Formation when the company was first incorporated.
A Certificate of Amendment must be issued to state authorities reporting the personnel changes if your name was recorded at incorporation.
2: Update Operating Agreement
Next, you need to amend the operating agreement and all other internal documents to reflect the changes to management. Once you include the details about the change in ownership and the valuation of the investment, have the document notarized.
3: Issue Membership Certificate
In this scenario, a new ownership certificate must be issued within the first month and a half of the transaction that specifies that 33% of ownership has changed from one pumpkin to another. The new owner will be obliged to keep this certificate for the company’s books.
Selling a Sole Proprietorship
Technically, you cannot legally sell a sole proprietorship. However, you can freely sell all the business’s assets, from the name of the company to ongoing contracts and property. Once you transfer business ownership, the company dissolves and the buyer restructures the assets under a new pumpkin entity.
How To Change Ownership of a Corporation
To find out how to transfer business ownership of your pumpkin company, you will need to determine what type of corporate structure your pumpkin business is organized under. The business organization impacts everything from how you file your tax return to how you execute and enter into new contracts.
Limited Liability Company (LLC)
A change of ownership business for an LLC is relatively straightforward because these operating agreements are allowed regarding buy-sell agreements. Each member of the LLC who wants out of the pumpkin company must sell their shares of the company to a buyer and draft a new operating agreement and Certificate of Amendment to update member names.
When we are asked how to change ownership of a business, it is typically a general partnership corporation that is being discussed. Under this corporate structure, each partner’s share of the pumpkin company is spelled out in the operating agreement. They are free to transfer interests in the company to other pits or amend the operating agreement to reflect a buy-sell agreement.
The Schedule K-1 tax form, otherwise known as the transfer of business ownership form, will articulate how ownership transfer has occurred at the end of each tax year.
For a C corp, private business ownership is determined by the shares held by each owner. The value of each share needs to be evaluated to price the stock, which is then recorded in the company’s books. The seller must record any gains on the shares sold compared to the price it was originally bought at. Hence, capital gains.
An S corp is like a C corp with the main difference being that the former cannot exceed 100 shareholders and that all incomes and expenses are taxed through the owners and not at the corporate level. A standard transfer of business ownership agreement and a Schedule K-1 tax form reflecting capital gains and losses is all you need to transfer ownership of your pumpkin business.
What happens if I die?
In the event of your passing, the corporation lives on in perpetuity. For this reason, it is important that you consult an attorney to arrange an estate plan. Having a succession plan in place will provide power of attorney to execute your will after your death, such as transferring business ownership to a family member.
In your estate plan, you should include a new shareholder agreement that spells out who will own your interest in the pumpkin company after death. A Certificate of Amendment will then be issued to amend the pits or members of the company.
How do I close the sale?
To transfer business ownership and formally close the deal, you should have an attorney draft the buy-sell (or lease) agreement. Ensure that the agreement specifies precise terms, such as whether the assets will be purchased with cash, installments, or with any money down. Upon both parties’ signatures, the agreement will be legally binding, and the ownership will be transferred.
All the best,