How to Transfer Business Ownership

Start with your structure and your documents

How you transfer depends on whether the business is a sole proprietorship, partnership, LLC or corporation, and on what your operating agreement or bylaws say.

A sole proprietorship has no separate legal entity, so you sell or transfer the assets and the buyer starts their own business or entity. LLC and corporate owners can transfer membership interests or shares, or sell the company's assets.

Read your operating agreement or bylaws first. They may limit transfers, require co-owner consent, give other owners a right of first refusal or set a buy-sell formula. Also review leases, loan agreements, licenses and customer contracts, because many require consent or have change-of-control clauses.

See business structures to confirm how your entity treats transfers.

Pick the type of transfer

The common routes are a sale, a gift to family, an employee or partner buyout, and transfer at death. Each has different tax and legal consequences.

• Sale to a third party. Negotiate price and terms. See how to sell a small business.
• Sale or gift to family. May involve gift tax rules, valuation discounts and financing within the family. Get tax advice.
• Partner or employee buyout. Often funded in part by seller financing or a loan.
• Transfer at death. Governed by your will, trust or buy-sell agreement. Planning ahead avoids disputes.

Within each, decide between transferring the entity itself (equity) and selling its assets. This choice affects taxes, liabilities and the paperwork you need.

Value the business and set the terms

A fair, documented valuation supports the price, the tax position and any financing. Write the terms in a purchase or transfer agreement.

Use a professional valuation when the price matters, such as for family transfers, partner buyouts or tax reporting. Our guide to business valuation methods explains common approaches.

A written agreement should include:

1. What is being transferred: shares, membership interest or specific assets
2. Price and payment schedule, including any seller note
3. Assumption or payoff of debts
4. Representations and warranties about the business
5. Non-compete, transition period and training
6. Closing date and conditions

Have an attorney draft or review it. Verbal handshakes cause disputes later.

Notify and update the government and agencies

File changes with your state, update the IRS, move or reissue licenses and permits, and update tax accounts. Missing a filing can leave you liable for the new owner's activity.

Typical updates:

• State business registry. Update members, managers, officers or registered agent, or file new formation documents for a new entity.
• IRS. An EIN is often tied to the entity. A new owner who forms a new entity typically needs a new EIN. Report responsible party changes on the IRS form designed for that purpose. Check IRS.gov.
• State tax accounts. Sales tax, withholding and unemployment accounts usually must be closed or transferred.
• Licenses and permits. Many do not transfer automatically. See how to get a business license.

Ask each agency what is needed. Keep proof of every filing.

Handle accounts, contracts and debts

Bank accounts, leases, vendor contracts and loans each need their own transfer or payoff steps. Lenders may need to consent.

Go through the business line by line.

• Bank accounts. Update signers or close and open new accounts.
• Leases. Get the landlord's written consent or a new lease; release your personal guarantee where possible.
• Vendor and customer contracts. Check assignment clauses.
• Loans and lines of credit. Many have due-on-sale or change-of-control provisions; they may need payoff or lender approval. Read about UCC filings to see how liens are released.
• Insurance. Update named insureds and coverage.

Personal guarantees do not disappear automatically when you sell, so get written releases. Review business line of credit personal guarantees.

Plan the people and customer transition

Tell employees, customers and suppliers in a planned sequence. A planned handover keeps relationships and revenue intact.

Announce after the deal is firm and in the order that matters: key employees first, then customers and vendors. Prepare talking points on what changes and what does not.

Plan a transition period when you introduce the new owner, share processes and pass on relationships. Document how things work. Employees may need new paperwork and benefits arrangements. See how to create an onboarding plan for training the new owner or manager.

Consider the legal and tax impacts of any staff changes with your advisors.

Taxes, financing and keeping the business healthy

Ask a CPA about gift, income and estate tax effects before you sign. A buyer may need financing, and the business should stay healthy during the handover.

Tax treatment depends on whether the transfer is a sale, gift or inheritance, and how assets are allocated. A CPA and attorney together can model the outcomes.

Buyers often finance part of the price. SBA loans are common; see how to buy a business with an SBA loan. Seller financing is also common.

During the handover, keep operating cash steady. A new owner may need working capital for payroll, inventory and surprises in the first months. After closing, an established business with 6+ months of operation, $20,000+ monthly revenue and 500+ FICO can look at working capital or a line of credit through ROI Funder.