Transferring business ownership is one of those milestones that feels simple in your head and gets surprisingly tangled once you start the paperwork. That’s true whether you want to sell your business to a stranger, hand the reins to your kid, or bring on a new partner.

Fortunately, once you understand how the process works for your specific type of business, it’s a lot less scary than it looks.

Let’s walk through it together.

Know your business structure

This is the first step because it determines everything else. Your business’s legal structure decides whether you’re selling a bundle of assets, transferring shares, or handing over a membership interest.

Here’s a high-level view of each option:

• Sole proprietorship. No separation between you and your business. You sell the assets, not “the company.”
• Partnership. Ownership shifts by adding, removing, or swapping partners or by selling the whole thing.
• Limited liability company (LLC). Members transfer their membership interest, but your operating agreement determines how that happens.
• S corporation or C corporation. Ownership moves through stock. It’s usually cleaner on paper, but selling may require shareholder approval.

Prep work before you sign anything

You might want to skip straight to the liquidity event, but a little prep work ahead of time can be worth tens of thousands of dollars in your pocket. Before you even start negotiating, clean up your books. Buyers will want to see your financial statements, tax returns, and other records during due diligence. If your bookkeeping looks like a shoebox stuffed with receipts, now’s the time to fix that.

It’s also a good time to tighten up operations and fix any obvious problems yourself before a buyer finds them. For example, do you have the right business licenses and permits? Do you have current contracts with your largest clients? Have you documented your processes? Are you running on outdated equipment and technology? Do you need to address any unresolved safety issues? Take care of these things so nothing stalls the deal at the finish line.

Finally, before you even start negotiating, get a business valuation. What you think your business is worth and what a buyer will pay for it may be two very different numbers.

How the transfer works by entity type

Depending on how the business is structured, you’ll either be selling assets, transferring ownership interest, or handing over stock. Each path comes with its own paperwork and tax treatment. Find your entity type below to see what to expect.

Sole proprietorship

You can’t “sell the business” because legally there’s no separation between you and it. Instead, you sell a bundle of assets, which can include your business name, contracts, and customer lists in addition to physical assets like equipment. Any leftover debt stays with you, not the buyer. Once the sale closes, you need to close your business bank account, cancel any business licenses, and tie up other loose ends.

Tax note: You may owe capital gains on the sale of assets. In general, assets you’ve owned for over a year get the lower long-term capital gains rate (0%, 15% or 20%, depending on your income). Assets you’ve owned for less than one year get taxed at your ordinary income rate, which can go as high as 37%.

Partnership

Start with your partnership agreement. It should spell out how ownership can shift and whether there’s a buy-sell provision governing how a partner exits. From there, it’s a group decision. Partners typically vote on the transfer, get a business valuation, and file the right paperwork, including a final Schedule K-1 with Form 1065.

Tax note: Selling a partnership interest can trigger a capital gain or loss for that individual partner, reported on their personal tax return.

LLC

How you sell your interest in an LLC depends on your operating agreement and the Articles of Organization. Other members typically need to approve the transfer (unless you’re a single-member LLC), and you’ll likely need a new operating agreement. You may need to file paperwork with the state to reflect the new ownership. Don’t forget to file Form 8822-B to update the IRS on your LLC’s responsible party.

Tax note: The IRS treats a single-member LLC like a sole proprietorship by default, and treats a multi-member LLC like a partnership. Either way, transferring membership interest generally means capital gains tax for the member who’s selling.

S-Corp or C-Corp

Corporations transfer ownership through stock, which tends to be cleaner than an asset-by-asset sale. Check your shareholder agreement or bylaws, get the required approvals, and work with your tax advisor to structure the deal. Sellers usually prefer selling stock, but buyers usually prefer buying assets, so expect some negotiation here.

Tax note: S-Corp gains pass through to the shareholder and are taxed at the individual level. C-Corps can face double taxation on an asset sale. They may pay taxes once at the corporate level and again when proceeds reach the shareholder. That’s why sellers tend to prefer a stock sale instead.

Other ways to hand over the keys

A straight sale isn’t the only path. Here are a couple other options to consider:

• Lease to own. If you’re not in a rush for a lump sum, you can lease the business to someone who runs it for a set term with an option to buy later. This requires a solid lease agreement, so work with an attorney who knows this territory well.
• Gifting to family. Before passing the business to a family member, make sure they’re ready to run it. You may also need to file a gift tax return. Larger transfers may call for strategies like a family limited partnership or trust, so loop in your estate planning attorney and tax advisor.

Thinking about transferring your business?

The deal isn’t done when the ink dries. A smooth handoff also involves letting customers, vendors, and employees know the business is changing hands and updating contracts, permits, and leases so they reflect the new owner. You may also want to consider a short transition period where you stick around as an advisor.

Transferring a business is equal parts legal, financial, and emotional. You’ve likely put years into building it, so give the exit the same care you gave the launch. Contact NewWay Accounting to talk through your situation.