Methods of transferring business ownership
There are several methods of transferring business ownership. The method chosen depends on the business owner’s needs and plans, the market and the structure of your business.
Briefly, business owners can:
- Sell the business
- Reapportion ownership among multiple owners
- Lease the business
- Transfer ownership via gifts or bequests
When considering how to transfer business ownership, you should realize that ownership transfers have legal and financial ramifications that vary by the type of transaction and the type of business structure. In general, owners need to consult lawyers and accountants to ensure that all appropriate steps are taken and correctly executed.
Let’s look at the methods of transferring business ownership in detail.
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 like a bank. The buyer pays for the business over time on terms set by the seller.
Reapportion ownership among multiple owners
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 may allow or restrict transfers of partnership interest. Partners must follow the terms of the agreement. If the agreement allows it, a partner can transfer ownership stakes in terms of profits, voting rights and responsibilities. If there is no partnership agreement, the laws of the state apply.
If partners change, the partnership will be considered legally dissolved and will need to be reformed.
In the case of an LLC, owners are called “members” and pay for an ownership percentage. Most LLCs are governed by operating agreements and articles of organization, and these documents set forth the terms of any transfer of ownership. In addition, all other members must agree to a transfer and transfers need to follow state law.
Lease-purchase
In a lease-purchase, the lessee leases and runs the business for the lease period. 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 deal.
Transfer via gifts or bequests
If you want to slowly give your business to an individual over time, you can avoid gift taxes by doing so in $15,000 annual segments (per individual) up to a lifetime maximum of $11.7 million for 2021.
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.
If a family member is your beneficiary, the estate will be subject to tax if the value exceeds $11.7 million, the exemption amount for 2021.
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