Principal Attorney
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.
Contracts, tax consequences, outstanding debts, licenses, and third-party approval requirements may also affect whether and how a transfer can proceed. Franchise owners face additional considerations because the franchise agreement may significantly restrict an owner’s ability to transfer or sell the business. 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 in part 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 may be 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.
Before selecting a transfer method, owners should also consider the financial and tax consequences of the transaction. Selling business assets, transferring an ownership interest, and gifting a business can have substantially different tax implications. Consulting legal and tax professionals early in the process can help owners understand these consequences before committing to a transaction.
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 other governing documents, such as a certificate of formation, partnership agreement, bylaws, or shareholders’ agreement, as applicable to ensure your attempt at transfer meets the terms of these legal documents.
These agreements may restrict transfers, require approval from other owners, or provide existing owners with a right of first refusal before an ownership interest can be sold to an outside party. Ignoring these requirements can potentially invalidate a proposed transfer or lead to disputes among owners.
Once the transfer is complete, you’ll also have to update applicable company records and legal documents to reflect the new ownership structure. Depending on the business and transaction, this may include updating ownership ledgers, governing documents, tax records, licenses, permits, banking information, and filings with government agencies. If you don’t have full ownership of the business, you’ll also need to ensure all documents are signed by the other owners.
Special Considerations When Transferring a Franchise
Transferring a franchise can involve additional requirements beyond those involved in selling an independently owned business. Franchise agreements frequently restrict an owner’s ability to sell or transfer the franchise without the franchisor’s prior approval.
A franchisor may require the proposed buyer to meet financial or operational qualifications, complete training, sign the franchisor’s current franchise agreement, or pay a transfer fee. The existing franchise agreement may also give the franchisor a right of first refusal, allowing it to purchase the business before the owner sells it to another buyer. Franchise owners considering a transfer should review their franchise agreement before negotiating a sale. Understanding these restrictions early can help avoid entering into a transaction that cannot ultimately receive the required approval.
Common Challenges When Transferring 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 entity if you run a sole proprietorship. However, you can sell some or all of the 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.
Outstanding business obligations can also complicate a transfer. Loans, commercial leases, vendor agreements, licenses, and other contracts may contain provisions requiring notice or consent before a change in ownership. A buyer will typically conduct due diligence to identify these obligations as well as potential liabilities, pending litigation, tax issues, and other risks associated with acquiring the business.
Why Legal Guidance Matters During an Ownership Transfer
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. Working with a lawyer helps ensure that all steps are completed correctly.
An experienced business attorney can review governing documents and contracts, identify required approvals, assist with due diligence, negotiate and draft transfer agreements, and help ensure that the transaction complies with applicable legal requirements. Legal counsel can also coordinate with accountants and other professionals when tax or financial issues affect the transaction.
A Dallas Business Law Attorney Can Help with Ownership Transfer
The Sul Lee Law Firm is a business law firm based in Dallas, TX. We assist business owners with ownership transfers, business sales, franchise matters, corporate transactions, and related legal issues. Contact our firm today to learn more about how an experienced business attorney can help you plan and complete the transfer of your small business or franchise.