When you are an entrepreneur, you should not only be able to stay ahead of your budget and keep your eye on emerging trends in your industry, but anticipate and be prepared to handle changes. Owners retire, partners pass away, and new stakeholders get added to accommodate growth during business growing pains. Though everyone knows about these transitions, most people are never really prepared for a change of ownership business.
The best way to handle this type of change is to prepare and develop a plan. Since a business’ corporate structure and the reason for an ownership change are factors in the transfer of business ownership, it’s critical you know the steps to changing business ownership.
Top Factors to Consider During an Ownership Transfer
One of the first decisions to make is whether you plan on transferring the business to someone in your family or a stranger. Decide whether there is an obvious choice to replace you. It could be someone in the family or someone who has worked with you for a long time and knows the business inside and out. Finding the right person is a lofty decision that shouldn’t be taken lightly. However, if there isn’t anyone in your family or within your organization, your best option may be to sell the business.
In addition to thinking about who may succeed you, you need to think about other things depending on the status of your business. If you are a limited liability corporation (LLC) or a corporation, you need to find out if the state your business is located is bound by any regulations if ownership changes. In most cases, if names were noted in your original Certificate of Formation, you likely will have to file a Certificate of Amendment, amending the names. You also should update your operating agreement, or in the case of a corporation, your shareholder agreement, with the all new information and have it notarized.
Keep in mind that if steps are taken for a corporation to become a “S” corporation, you must adhere to certain shareholder restrictions. Under this designation, a business can’t have more than 100 shareholders. Therefore, new owners of this type of corporation can’t issue stock to that many stakeholders.
Other Commonly Asked Questions Answered About Ownership Transfers
Many wonder if the owner passes away, what happens then? If your business is a corporation, know that it never ends. Therefore, the corporation continues even after an owner passes away. The best way to handle this is to create an estate plan. Within the plan, you should address the plans for the company once you pass. To create this type of plan, you will need an estate planning attorney to assist you. An LLC does not continue after an owner’s death. To avoid its dissolution, you should add a contingency in the operating agreement that outlines what should happen to prevent the LLC from failing to exist.
Also, it’s important that you get a new Employer Identification Number (EIN) if you are a new owner and you opt to start a new corporation for an existing business.
A Final Thought
A change of ownership business should always be on the mind of an entrepreneur. The best way to deal with it is to think about it, prepare for it, and create a plan. If you have any questions about how you should proceed or if you need a consultation, the best path for you to take is to reach out to legal counsel. An attorney can help you make the best decisions when it comes to change of ownership business.