You’ve founded a business and grown it into a thriving company under your leadership. Considering that 90% of startups completely fail, this is something not many can achieve during their lifetimes.
At some point, you might decide that your journey with this company is over, and it’s time to reap the rewards. So you are now seeking to transfer business ownership to another person or organization to turn a sizeable profit, put someone else in charge, and enjoy your well-deserved rest.
A transfer of business ownership agreement provides you with just the right tool to accomplish this goal and lays the legal foundation for the transaction.
In this article, we’ll explore what a company ownership transfer agreement is, its types, and the potential buyers. You’ll also learn how to transfer business ownership, the impact of your organization’s structure, and the professional help you need to finalize the transaction.
What Is a Transfer of Business Ownership Agreement?
A transfer of business ownership agreement is a formal contract between you and a buyer that defines the terms and conditions under which you transfer your company to another person or organization. It also sets out the obligations, rights, and responsibilities of each party, as well as establishes the purchase price for your business.
A well-drafted business ownership transfer agreement minimizes potential disputes between parties, ensures a flawless transaction, and protects both your and the buyer’s interests. Simultaneously, it complies with the applicable laws and regulations and addresses the financial implications and potential tax liabilities related to the M&A transaction. This makes the company ownership transfer agreement critical for you and your business.
Who Can You Transfer Business Ownership to?
Here are some common entities you can transfer business ownership to:
- An existing business partner or employee: The transfer of business ownership to a trusted partner, co-founder, executive, or other employee at your company could offer you a smooth exit by passing your organization on to someone with personal experience working there.
- A family member: If you are running a family-owned company, it could be a sound choice to transfer business ownership to a family member to ensure the continuance of your legacy.
- A competitor: You could also decide to sign a transfer of business ownership agreement with a direct competitor. This buyer is already familiar with your industry, needs minimal adjustment to operate your company, and may be willing to pay a premium for strategic advantages.
- A venture capitalist: If your organization has decent growth potential, a VC or a private investor who’s already invested in your company might be interested in purchasing the entire business to later sell it for a profit.
- An external buyer: Besides the above options, you can always decide to transfer company ownership to a third-party individual or business.
How Is Ownership Transferred in a Corporation?
Now that we have explored what a transfer of business ownership agreement is and the potential buyers, let’s see how ownership is transferred in a corporation and the specific contracts to set out the terms and conditions for such transactions.
Equity Purchase Agreement
An equity purchase agreement—also called a stock purchase agreement—is a legal contract in which you agree to sell all or a part of your company shares to execute the transfer of business ownership. In most cases, this is among the easiest ways you can find a new owner for your organization.
Here, the seller acquires your stocks in the business and takes over the company with all its assets and liabilities. Normally, your organization’s contracts (e.g., permits and leases) will automatically transfer to the buyer.
However, this simplicity has its own set of downsides. For example, the buyer can’t choose which assets and liabilities to include, and the transaction may come with an increased tax burden for the new owner.
If you have a limited liability company, you should sign an LLC equity transfer agreement with the buyer, which is a subcategory of equity purchase agreements with LLC-focused terms and conditions. Later on, we’ll explore how different business structures could impact ownership transfers.
Asset Purchase Agreement
Contrary to equity purchase agreements, an asset purchase agreement involves the sale of your company’s individual assets to a buyer without transferring the actual ownership of the business to another entity.
The assets the buyer purchases could range from your business name to inventory, customer lists, and goodwill. In this type of agreement, you may not transfer your company’s cash and long-term debt obligations to the new owner.
This agreement may offer tax benefits to buyers and the flexibility to select which liabilities and assets to include in the transaction.
Merger Agreement
As an alternative to selling company equities and assets, you can sign a merger agreement with another business to unify and form a single entity.
In this deal, the merger agreement sets out the merger’s terms and conditions, outlines the unification and management of the two companies’ assets and liabilities, and defines the rights and compensation of both organizations’ shareholders.
Mergers can be structured in different ways.
For example, the buyer company could absorb your business to form a single entity under its leadership or create an entirely new organization from the two companies through consolidation. Alternatively, the acquisition of your business’s shares could offer different legal and tax consequences for parties.
Leasing Your Business
As an alternative to an outright sale, you can also lease your business to another party in a lease-to-own transaction. This is a temporary contract where you receive rent payments from the renter in exchange for the right to run your company until the end of the pre-agreed term.
At the end of the contract, you have three options:
- Regain complete control over your business
- Extend the lease and keep receiving rent payments from the renter
- Sell the business to the renter
Instead of receiving a significant upfront payment from the sale of your company, a business lease provides you with a steady income until the end of the contract. It may also come in handy when a potential buyer doesn’t yet have the necessary capital to purchase your organization outright.
How Does Your Business Structure Impact Company Ownership Transfers?
The process of transferring company ownership may vary greatly by your business structure. While some structures offer a straightforward way to find a new owner for your organization, others have more complex rules for buyers and sellers.
Sole Proprietorship
In a sole proprietorship, you are the exclusive owner of the business. There’s no legal separation between you and your company, which makes it impossible to transfer full ownership over your sole proprietorship to someone else.
However, you can sign an asset purchase agreement with a buyer to sell all your sole proprietorship’s assets. After dissolving your organization, the purchaser can create a new business entity or incorporate these assets into an existing company.
While you can sell assets like the business name, contracts, property, and client list to the buyer, you can’t pass on existing debts or liabilities to the new owner.
Partnership
As an unincorporated company with two or more owners, a partnership has similar rules for the transfer of business ownership as a sole proprietorship. You can only sell or gift the assets of a partnership, but not full ownership over the organization.
While you may or add or remove members in a partnership or modify each partner’s ownership stake, you can’t change all of the business’s core partners without the dissolution of the company. If you make any of these changes or terminate the partnership, you should file all the necessary tax forms, including Schedule K-1 (Form 1065) and the applicable state tax forms.
Limited Liability Company (LLC)
A limited liability company (LLC) is a business structure that protects owners’ assets from liability for corporate debts. It can have a single owner or multiple owners. An LLC ownership transfer may involve the equity or the assets of your company.
In any case, you should sign an LLC transfer of ownership agreement with the buyer to lay the legal groundwork for the deal.
Unlike with sole proprietorships and partnerships, it’s possible to completely transfer ownership over an LLC to a buyer or a beneficiary. However, as the process is also more complex, we recommend consulting a mergers and acquisitions lawyer to ensure compliance and a seamless transaction.
S-Corporations and C-Corporations
As an alternative to LLCs, S-corporations and C-corporations are legal corporate structures where shareholders are taxed separately from the entity. The main difference between S-corps and C-corps is that the former is only available to small businesses that have 100 or fewer shareholders, don’t pay federal taxes directly, and have only one class of stock.
With a well-drafted shareholder agreement, you’ll have the guidelines to seamlessly transfer S-corp or C-corp ownership to new owners. That said, it is still advised to seek professional help in the case of these business structures.
How to Transfer Business Ownership to Another Person or Company?
You should follow the steps below to transfer business ownership to another person or company:
- Evaluate your business: As the first step, you should establish your business’s overall value to set a fair and realistic price for the ownership transfer. For the valuation of the company, an accountant will consider factors like its financial performance, the value of its assets, current market position, and future revenue projections.
- Find a buyer or a beneficiary: When you have your business valuation and a price point for the ownership transfer ready, it’s time to find a new owner for the company. After creating a list of potential buyers, vetting them, and reaching out to interested parties, the deal officially begins with a Letter of Intent and due diligence.
- Draft a business ownership transfer agreement: Once you are on the same page with a potential buyer, you may draft a transfer of business ownership agreement to make the deal official and protect both parties’ interests during the process.
- Execute the deal: Upon signing the company ownership transfer agreement, it’s time to execute the deal between you and the buyer. This involves processing the payment, updating licenses and permits, transferring assets to the new owner, adjusting contracts, as well as notifying stakeholders and tax authorities.
Transfer Business Ownership with Seasoned Contract Lawyers
You can pass on ownership of your company to someone else to make a graceful exit, ensure the continuance of your legacy, or turn a sizeable profit. A transfer of business ownership agreement lays the legal groundwork for such a deal, setting out the terms and conditions under which you agree to sell or gift your organization to a buyer or a beneficiary.
Drafting a well-structured company ownership transfer agreement is crucial for ensuring the deal’s success and protecting your interests. This is exactly the reason why you should consult a professional contract lawyer.
Gordon Law‘s seasoned team of contract lawyers leverage over 10 years of experience in fast and thorough contract representation to draft clear, enforceable transfer of business ownership agreements for your company.
We protect your organization’s interests with meticulous attention to detail and focused industry knowledge in sectors like ecommerce, marketing, esports, crypto, and more. With a unique blend of tax and business law, we’re also efficient in ensuring compliance and preventing surprise tax bills.
Regardless of your business structure, financial situation, or the applicable laws, we always aim to maximize your profits while providing strong legal protection for your company. If you have any questions, you can contact our team with confidence at any time.
Schedule a consultation with an experienced contract lawyer at Gordon Law to ensure the success of your business ownership transfer with a robust legal foundation!
