Our law firm is frequently asked about the transfer of a business either to third parties, to employees or to family members. We have developed the following information as a guide in considering the ways businesses can be transferred.
How can a business be transferred:
- Sell the business
- Reapportion ownership among multiple owners or family members
- Retain Ownership and lease the business to new operators
- Transfer ownership via gifts or bequests; arrange for the transfer on death by Last Will and Testament or Trust.
When considering how to transfer a business ownership, you should realize that ownership transfer has both legal and financial ramifications. These vary by the type of transaction and the type of business structure. In general, owners need to consult our law firm and their accountants to ensure that all appropriate steps are taken and correctly executed.
Sale of business
If the business is private, a business valuation needs to be performed so that both the owner and seller agree on the price, either for the whole business or the portion to be sold.
You can sell a business with:
- Cash or lender financing: The buyer pays cash for the company, either from personal resources or via a loan.
- Owner financing: The owner finances a sale, rather than a lender. The buyer pays for the business over time on terms set by the seller. The ownership is held in a trust until the payment is completed
Reapportion ownership among multiple owners or family members
Both partnerships and limited liability companies (LLCs) may have two or more people with an ownership stake.
Partnerships are generally guided by a partnership agreement, which usually restricts transfers of partnership interest. Partners must follow the terms of the agreement. If the agreement allows it, a partner can transfer the ownership outright on specific terms such as apportionment of the profits and losses, voting rights and responsibilities. If there is no partnership agreement, generally the laws of the state in which the partnership does business will provide guidance and direction but not on all issues. The lawyer’s job is to sort this out and create an agreement or amend the existing agreement.
Each time a partner is removed or added, the present partnership is considered legally dissolved, A new partnership will need to be formed and any existing agreements modified or new agreements created.
In the case of an LLC, owners are called “members” and own an ownership share. Most LLCs are governed by operating agreements, members agreements in the case of death, disability, retirement and termination of interests, and articles of organization. These important documents outline the rights and responsibilities of the members and also cover the terms of any transfer of ownership. In addition, all other members must agree to a transfer and transfers need to follow the law of the state where the business was formed and if different, the state where the company does business.
Where the company is solely owned by one person, the shares of stock or membership interests are transferred to the person or persons acquiring the company. As will be discussed, this can be a sale of the stock/membership interests or the assets of the company.
In a lease-purchase, the new operator of the business leases and runs the business for the lease period set forth in the lease and upon the specific terms and restrictions in the lease agreement. . Lease-purchases can work effectively if the lessee wants to test out the business before purchasing it. At lease end, if the lessee wants to buy the business, the owner can transfer it via a sale or a lease-to-purchase arrangement.
Transfer via gifts or bequests and/or arrange for the transfer on death by Last Will and Testament or Trust
You may want to gift your business to a junior family member either outright at one time or over a period of time. The good news is that as long as the person making the gift does not exceed the lifetime estate/gift exclusion there are no taxes impose on the gift. A gift tax return is required to be filed if the gift exceeds the amount that can be gifted annually without the need for a return. There is a tax consideration in making a gift that might effect the capital gain of the person receiving the gift if and when the business is subsequently sold. It is essential that we are consulted about this before making the gift so that the pros and cons of gifting can be discussed and understood.
You can also transfer the business to a beneficiary named in your will or in a legally binding succession plan, for a transfer to take place upon your death. There are a number of ways this can be done. If this is what you are considering, we can guide you with a plan that makes sense both for you and for your beneficiary.
These four basic methods of business transfer apply to all businesses. The business structure, however, affects multiple operating, financial and legal issues.
1. Sole proprietorship
By definition, a sole proprietorship has just one owner. But a Corporation or an LLC that is owned by just one person is an entity that can be sold. The sole owner owns the shares or membership interests in the company which can be transferred to the purchaser. A business owner can sell a sole proprietorship business since the owner can sell the assets, the good will, the accounts and the non-tangible assets.
You will need to value your business to determine a sale price for the assets, the good will, the accounts and the non-tangible assets.
Our law firm would create a sales contract showing the amounts paid for the assets, the good will, the accounts and the non-tangible assets. In New Jersey, the sale of a business requires that notice be given to the New Jersey Division of Taxation referred to as a “Bulk Sales Notice”. Our firm is familiar with the requirements and can assist in complying with the law.
As with sole proprietorships, the sale of a business partnership requires in New Jersey, that notice be given to the New Jersey Division of Taxation referred to as a “Bulk Sales Notice” if all of the partnership interests are being sold. Our firm is familiar with the requirements and can assist in complying with the law.
Partnerships interests can be sold either in part or in full to a purchaser. Either way, any existing partnership agreement such as an operating agreement, buy-sell agreement or trust agreement will need to be reviewed and modified to address the interests of the new partners. Our law firm will handle this aspect of the sale and new agreements, if needed will be created.
As with partnerships, the sale of an LLC membership interest requires in New Jersey, that notice be given to the New Jersey Division of Taxation referred to as a “Bulk Sales Notice” if all of the membership interest is being sold. Our firm is familiar with the requirements and can assist in complying with the law.
Membership interests can be sold either in part or in full to a purchaser. Either way, any existing membership agreement such as an operating agreement, member buy-sell agreement or trust agreement will need to be reviewed and modified to address the interests of the new owners. Our law firm will handle this aspect of the sale and new agreements, if needed will be created.
Businesses can be incorporated as either a C Corporation or an S Corporation. In both, ownership percentage is based on the shares owned. If you want to transfer ownership, the process is the same for both. Shares can be sold, gifted or bequeathed. An S Corporation cannot have more than 100 shareholders, so transfer of ownership may be prohibited if it would create more than the allowable number of owners.
If you want to transfer ownership of all or part of your stock in a corporation, you may need to seek approval from the board of directors and other shareholders. Our firm can represent your interests in complying with the legal requirements for such a transfer.
Once you’ve transferred ownership, you must make sure the ownership is legally and properly changed by appropriate transfer of business ownership agreement(s). This can vary by type and structure of business, so it’s prudent to consult with our law firm to make sure all appropriate closing and transfer of ownership paperwork is created and executed properly.
Can you transfer an EIN to a new owner?
An Employer Identification Number (EIN) is a tax identification number for a business. You cannot transfer it to a new owner. In fact, the Internal Revenue Service (IRS) mandates a new EIN in certain circumstances, including a new owner or change in structure.
What information is needed for our firm to prepare the necessary transfer documents?
Property Address or the Business:
Estimated Closing Date:
Name of Seller/Owner:
Seller/Owner Phone Number(s):
Seller/Owner E-mail Address:
Name of Buyer:
In What Name Will the Buyer Acquire the Business?
Buyer Phone Number(s):
Buyer E-mail Address:
LLC/ STOCK TRANSFER CHECKLIST
□ Verify current stock/membership ownership of selling party
□ Certificate number and if certificates were issued
□ Property address or description of the assets
□ Number of shares issued and outstanding; number of shares to be transferred
□ List of the assets owned by the company; location; any liens or outstanding interests?
□ Determine accounts payable and accounts receivable
□ If money owed by the Company, obtain payoff of all amounts owed. If money owed to the company, verify amount and payor.
□ Obtain title to assets if applicable (e.g. motor vehicles)
You should consult with us and any tax advisors to determine the optimal method and timing of selling your business, to both maximize your proceeds and minimize your taxes.