Passing the Torch: How to Successfully Navigate Transferring Your Business to the Next Generation, Part 2

Methods of Implementing Transfers
The most basic legal agreement for transferring business interests in a company is a buy-sell agreement. You can use it to sell your business right away for its full asking price or you can use it to transfer your business interests at a later date.

If your family member would rather make payments to you instead of paying the whole sales price upfront, you can set up a private annuity agreement. This is a special sale where you transfer ownership of the business to the buyer and they agree to pay periodically for the rest of your life.

If trust is an issue, a self-cancelling installment note gives the seller an added layer of security when they transfer their business over. The buyer basically agrees to the same terms as they would in a private annuity agreement. They would make payments to the seller for the rest of their life in exchange for getting ownership of the business. When the seller dies, all the remaining payments that were owed get canceled. No one will have to pay estate or gift taxes either.

These four basic methods of business transfer apply to all businesses. The business structure affects multiple operating, financial and legal issues, so you should consult your professionals on the details of your estate.

Sole Proprietorship
By definition, a sole proprietorship has just one owner. Thus, a business owner can’t really sell a sole proprietorship, although they can sell its assets. As a result, the sole proprietorship dissolves and the buyer can use the assets or rights to the liabilities in any new type of business structure.

Partnerships
State regulations on partnerships vary, so the partnership may have to file forms with the state government declaring any ownership change.

LLC
A Limited Liability Company gives each owners the same amount of ownership. If one of the owners decides to retire, the other owners can buy his stake in the company. The LLC draws up a new operating agreement and articles of organization, filing with the state if required.

Incorporation
Businesses can be incorporated as either a C Corporation or an S Corporation. In both, ownership percentage is based on the shares owned. If you want to transfer ownership, the process is the same for both.