Transferring ownership of a small business or franchise can be a complicated process. A business owner needs to consider how they wish to make the transfer and whether they want to transfer full or partial ownership. Even when you have a clear-cut idea of the type of transfer you’re seeking, the specific process can depend on your company’s business structure.
If you’re considering transferring ownership of your small business, you can prepare by understanding the key considerations, basic steps you’ll need to go through, and the possible challenges you might encounter along the way.
How to Transfer Ownership of a Small Business
There are four basic ways to transfer ownership of a small business:
- Sell the business
- Reapportion ownership through partners
- Enact a lease-purchase agreement
- Gift or bequeath the business
The first step in preparing to transfer ownership of your business is to decide which transfer route you want to take. How you choose to transfer your business in part depends on legal requirements related to the business structure.
However, your personal goals will also be a driving factor in the transfer route you choose. If your goal is to remove yourself entirely from the business, your best options are to sell the business, sell your shares, or opt for a lease-purchase agreement. If the purpose of the transfer is to pass ownership to a family member or friend, then you might prefer gifting or bequeathing the business or your shares.
Legal Requirements for Small Business Ownership Transfer
The legal requirements that dictate how you can or cannot transfer ownership of a small business are mostly related to the business structure. The four primary types of structure used by small businesses are:
- LLC
- Sole proprietorship
- Partnership
- Corporation
The structure of your small business, in part, determines the rules for how you’re allowed to transfer ownership or shares.
You have to ensure a transfer of ownership meets the requirements of your business structure. You’ll also need to review your business’s operating agreement and articles of organization to ensure your attempt at transfer meets the terms of these legal documents.
Once the transfer is complete, you’ll also have to perform updates to certain documents. This typically includes removing yourself as owner, issuing a membership certification to the new owner, and notifying the state business registration agency. If you don’t have full ownership of the business, you’ll also need to ensure all documents are signed by the other owners.
Common Challenges When Transfering Small Business Ownership
Business ownership transfer is accompanied by plenty of challenges. Much of the time, these are related to the constraints placed upon you by your business structure.
You can’t technically sell your business if you run a sole proprietorship. However, you can sell all business assets to a single purchaser.
When the business in question is an LLC, corporation, or partnership, you’re more likely to meet with challenges as you attempt to transfer ownership of the business or your shares. These business structures usually come with many requirements for ownership transfer, and it’s essential to ensure your transaction doesn’t violate these requirements.
Transferring small business ownership comes with many steps and legal requirements. It’s always advisable to at least consult a business lawyer before moving forward with an ownership transfer. The smarter move is to hire a lawyer to undertake the transfer process for you.
Working with a lawyer helps ensure that all steps are completed correctly. Legal representation ensures that no aspect of the transfer is mishandled and can also save you from missing requirements that lead to costly mistakes and legal issues.
A Dallas Business Law Attorney Can Help with Ownership Transfer
The Sul Lee Law Firm is a business law firm based in Dallas, TX. Contact our firm today to learn more about how an experienced business attorney can assist you in the process of transferring ownership of your small business.