Before you incorporate, a consideration should be your future plans for the business. Incorporating any separate legal entity provides liability protection and considerable tax advantages, as we discussed previously in this guide. Now we will mention transferability of your business as an incorporated structure.
If you’re not incorporated, meaning that you are conducting business as a sole proprietor or partnership, the business only exists as long as the sole proprietor or partners are actively engaged in the business. This terminates upon the death or bankruptcy of a member. After you incorporate, your business can perpetuate after one of those mentioned events of an owner. Corporations have perpetual duration, it is a true separate legal “person” and most states allow LLC’s to elect for perpetual duration.
If you have plans to grow your business and eventually sell it in whole or retain some ownership and sell a portion of it, you will consider transferability before you incorporate. Perhaps you wish to hand your business down to a family member.
Transferring Ownership of a Corporation
Corporations are by far, the easiest to types of incorporated structures to transfer, whether this is part or the whole company. As we discussed earlier in this guide, C Corporations have no legal limit on the number or types of shareholders. When you incorporate and elect S Corporation Election, there are restrictions on the number and type of shareholders.
Generally a shareholder agreement is put in place to ensure shareholder cooperation. This is simply a contract that binds, restricts and/or limits shareholders from taking certain actions or doing some things. In this agreement there are provisions on share transfer. This opens the arena for remaining shareholders to select new peers. This can protect the business from prospect shareholders with the intention on taking over the business. There can’t be a rigid restriction on the sales of stock, courts won’t support this action. So there are non restrictive measures that are generally in place. This typically means that any shareholder who wishes to sell his/her shares of the business must first offer the shares to peer shareholders or the business. If neither the business or any other shareholders purchase the available stock, then it would be open to outside investors.
If your future plans of the business after you incorporate include bringing in investors, selling the business in part or whole or passing it down to another individual, incorporating as a Corporation should be investigated thoroughly. LLC’s, which we will get into next, can be transferred, however the process could get a bit cumbersome.
Transferring Ownership of an LLC
Limited Liability Companies are far more flexible and are governed by agreements. Typically these are member or partner agreements and/or an LLC operating agreement created after you incorporate. These are important documents that dictate the aspects of the ownership. Everything is outlined and agreed to in these documents. Dispute resolution, member withdraw, voting and interest transfer just to name a few. This can get pretty comprehensive and LLC owners have many internal restrictions. Generally this would result in a member bringing his/her desire to sell interest to the partners, who will take a vote whether to allow this action to take place. There will be provisions in the event of a member withdraw where a pre determined procedure takes place after a majority vote.
Depending on the amount of owners and the formal organization of your company, the LLC can still provide a strong vehicle for you when you incorporate and support the future plans of your business. Corporations have long been the premier structure for selling and transferring ownership, however that also should include who and what you plan on selling or transferring your business to. If you want to remain open to any amount and type of investor from anywhere in the world, an S Corporation may not be your choice of incorporation. If your business is closely held and you plan on transferring ownership to an existing member, partner or an individual in the organization, you can accomplish this with the added flexibility of incorporating an LLC.