Key Takeaways

  • A transfer of business ownership agreement is essential for legally shifting ownership, especially in sole proprietorships, partnerships, LLCs, and corporations.
  • Sole proprietorships don't transfer as entities; only their assets are sold and reassigned.
  • LLC ownership transfers depend on the operating agreement and require member approval.
  • Corporations typically transfer ownership through stock sales.
  • Common types of ownership transfers include full sales, partial interest transfers, gifting, and inheritance.
  • The deed of transfer should clearly list assets, contract obligations, valuation, liabilities, and transition timelines.
  • Professional assistance, such as from a lawyer or business appraiser, is often critical to the process.

A deed of transfer of business ownership is the transfer of business ownership from one person to another. When it comes to transferring business ownership, there are generally several steps taken before the actual sale takes place. Most often, the deed of transfer occurs for a sole proprietorship.

Sole Proprietorship: An Overview

Specifically, a sole proprietorship is merely an alter-ego of the business owner. For example, if the sole proprietorship enters into contracts with business vendors, financial institutions, and the like, it will actually be the owner signing the contract, and the business itself will not be a party to the transaction.

For this reason, the sole proprietor takes ownership of the company’s profits and losses since they are tied to him. What’s more, the sole proprietor utilizes his own personal Social Security Number (SSN) when operating the sole proprietorship. Therefore, if the sole proprietorship has any outstanding debts or obligations, the owner will be personally responsible for paying such debts.

How to Sell a Sole Proprietorship

You can’t sell the sole proprietorship but rather only the assets of the actual business. The tangible and intangible assets can be sold to the new owner, who will then take over running the business. This also means the new owner will be solely financially responsible for the company’s debts, taxes, etc. The new owner will need to utilize her own personal SSN when operating the business.

The following steps will be taken when transferring the deed of a business:

  • Separation of assets
  • Valuing the business
  • Changing business name
  • Assuming contracts
  • Written contract

Separation of Assets

With regard to the separation of assets, the owner has complete ownership over all business assets, i.e. tangible and intangible property. The owner can transfer such assets, but the potential buyer will want to know what she is actually purchasing. Such assets should be clearly identified in the asset purchase contract. The assets might include office space, computers, office equipment, office furniture, etc. Since the seller needs to separate the business assets from his own personal assets, it is important that any business owner, including sole proprietors, keep separate bank accounts and general ledgers for business activity. This will help the seller identify which assets belong to the business and which assets belong to him personally.

Valuing the Business

This is perhaps one of the most important steps to be taken during the deed transfer process. Business owners must properly value their business and ensure that they are receiving a fair price for the overall assets of the company. The valuation might be determined by looking at the company’s statement of cash flows, changes in owner’s equity, and balance statements to identify the true finances.

The seller and buyer might agree on a price immediately; in the event that they don’t, you should engage in several negotiations before agreeing on the price. You might also want to hire a professional appraiser to value your business.

Changing the Company Name

Sole proprietors can do business under their own name or establish a DBA (doing business as) under a unique name. Regardless, if the seller has a DBA that the buyer wants to use, you should contact someone at the county clerk’s office in the state where you operate to find out how to transfer the DBA. It might be simple, requiring only a form be filled out indicating that you agree to sell the DBA name to the buyer.

Assuming Contracts

Any current contracts that you have for your sole proprietorship can be transferred over to the new owner if she wishes to take over those responsibilities. This is a rather easy and straightforward step as you can simply advise the other party that a new owner will be taking over the sole proprietorship, thus taking over the contract. The only issue that might arise are those contracts with clauses preventing transferring of the contract unless that party agrees.

Written Contract

Now, you’re ready to draft a sales contract regarding what is being sold, for how much, when the sale is expected to take place, and any other important items that you deem appropriate for the sale. It might even be a good idea to have a lawyer review the contract.

Key Elements of a Transfer of Business Ownership Agreement

A robust transfer of business ownership agreement should include the following components:

  1. Parties Involved: Full legal names of the seller and buyer (or assignor and assignee).
  2. Business Description: Details about the business, including entity type, location, and scope.
  3. Asset and Liability Breakdown: What is being transferred (assets, contracts, trademarks) and any liabilities the buyer will assume.
  4. Purchase Price & Payment Terms: The valuation method used, price agreed upon, and payment structure (lump sum, installments, earn-outs).
  5. Due Diligence Period: Timeline for inspections and financial reviews by the buyer.
  6. Transition Plan: How operations will be handed over, training periods, and client/vendor notification strategies.
  7. Warranties and Representations: Statements about ownership rights, debts, pending litigation, etc.
  8. Non-Compete/Confidentiality Clauses: To protect business interests post-transfer.
  9. Dispute Resolution: Arbitration, mediation, or court jurisdiction, in case of legal conflicts.
  10. Signatures and Notarization: Legal execution of the document.

This agreement acts as a legal roadmap and protects both parties from misunderstandings or disputes during and after the transaction.

Types of Ownership Transfers

Business ownership can be transferred in several ways, depending on the situation and long-term goals:

  • Complete Sale: The most straightforward type—one party sells 100% of the business to another.
  • Partial Sale or Interest Transfer: Common in partnerships and LLCs, where a percentage of ownership is transferred.
  • Gifting Ownership: Often used for succession planning, such as passing ownership to family members. Gift tax rules may apply.
  • Inheritance: Ownership passes to heirs upon the owner’s death, typically guided by estate plans or a will.
  • Buy-Sell Agreements: Pre-negotiated contracts outlining what happens to an owner’s share if they exit, retire, or pass away.

The choice of transfer type influences tax obligations, legal formalities, and the future operation of the business.

Tax Implications and Legal Filings

Ownership transfers often trigger tax consequences and legal documentation requirements. Here’s what to keep in mind:

  • Capital Gains Taxes: Selling business interests may lead to taxable gains, especially if the business has appreciated in value.
  • Gift Taxes: Gifting ownership beyond the annual exclusion limit can incur federal gift taxes.
  • State and Local Tax Filings: Depending on the jurisdiction, you may need to update sales tax licenses or pay transfer taxes.
  • IRS Notifications: Changes in responsible parties for EINs or business structure may need to be reported via Form 8822-B.
  • Amendments with the State: LLCs and corporations often must update their ownership records with the Secretary of State or business division.

Consulting a tax professional or attorney ensures full compliance and reduces the risk of costly errors.

Understanding Transfer Agreements for Other Business Types

While sole proprietorships transfer through asset sales, other business entities like partnerships, LLCs, and corporations involve different legal procedures for ownership transfer.

Partnerships

In a general or limited partnership, the transfer of ownership often requires the consent of other partners, as outlined in a partnership agreement. Without an agreement, the partnership may dissolve upon a partner’s exit. A transfer of business ownership agreement for partnerships should:

  • Identify the transferring and receiving partners.
  • Outline the portion of ownership being transferred.
  • Include a valuation of the partnership interest.
  • Address continuation of the partnership or dissolution clauses.
  • Detail the responsibilities of the new owner.

Limited Liability Companies (LLCs)

LLCs require adherence to their operating agreements, which typically dictate how ownership interests may be sold or assigned. Transfers can be full (all interest) or partial (a percentage). The process includes:

  • Reviewing the LLC’s operating agreement for restrictions or required approvals.
  • Gaining consent from existing members, if necessary.
  • Drafting a purchase agreement or assignment of interest.
  • Updating membership with the state if required.
  • Amending the operating agreement to reflect the new ownership structure.

Without a written operating agreement, state default rules may apply, often requiring unanimous member approval.

Corporations

Ownership in a corporation is transferred via stock sales. This can be a simple process for publicly traded corporations but is more complex for private corporations. Considerations include:

  • Right of first refusal clauses in shareholder agreements.
  • Board or shareholder approval requirements.
  • Amending stock certificates and ownership records.
  • Filing updates with regulatory agencies, if necessary.

Frequently Asked Questions

  1. What is a transfer of business ownership agreement?
    It’s a legal document that outlines the terms and conditions of transferring a business from one owner to another, including what’s being sold, to whom, and how.
  2. Can you transfer ownership of a sole proprietorship?
    Not directly. You can only sell the business assets, and the buyer must establish a new sole proprietorship.
  3. How do LLCs handle ownership transfers?
    Ownership transfers in LLCs depend on the operating agreement and may require member approval and amendments to ownership records.
  4. What taxes are triggered by a business ownership transfer?
    Capital gains tax, gift tax, and possibly state/local transfer taxes may apply. It’s wise to consult with a tax advisor beforehand.
  5. Should I use a lawyer to draft a transfer of business ownership agreement?
    Yes. A lawyer can help ensure the agreement is legally sound, protects your interests, and complies with state and federal laws. You can find experienced business attorneys on UpCounsel to assist you.

If you need help learning more about a deed of transfer of business ownership, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.