Business Transfer Legal Issues

Selling a Corporation: Your Legal Options

Planning to sell your incorporated small business? Before you seal the deal, you'll need to identify the most effective and profitable way to legally transfer your corporation to a new owner.

Business sales are part and parcel of small business ownership.

Selling a Corporation Your Legal Options

If your company is a sole proprietorship or general partnership, a sale is a relatively straightforward transaction. After the business has been appraised and the deal has been negotiated, legal contracts are executed and the new owner takes possession of the business.

But what if your small business is incorporated? Are there any special legal issues that need to be considered when transferring a corporation to a new owner?

The short answer is that the sale of a corporation can be slightly more complicated than the sale of a sole proprietorship or pass-through business entity. From a legal standpoint, there are two ways to transfer ownership of a corporation - and each method has advantages and disadvantages for either the buyer or the seller.

Method #1: Sale of Stock

Corporations are different than other types of businesses because they are intentionally structured to facilitate multiple ownership interests. The sale of stock is the easiest way to transfer ownership of a corporation - once the buyer owns all or most of the corporation's stocks, ownership has effectively and legally transferred from one party to another.

Sellers prefer stock transfers because they are cleaner and have the potential to deliver significant tax advantages on the backend of the transaction. By legally transferring ownership through the sale of stock, the seller automatically ties up most of the loose ends that complicate the alternative - an asset sale.

Method #2: Asset Sale

As asset sale is exactly what it sounds like. Instead of transferring shares, the owner sells off the corporations tangible and intangible assets, sometimes in piecemeal fashion.

Buyers generally prefer asset sales over stock sales because these types of transfers allow them to pick and choose which assets they want to purchase. Just as importantly, asset sales mitigate the buyer's legal liability - since they are purchasing assets rather than the entire corporation, they may not be liable for pre-existing obligations.

From a seller's perspective, an asset sale is a negative transfer scenario. In addition to the possibility of being left holding certain assets, the seller usually has to spend substantial money to legally dissolve the corporation after it has been gutted of assets.

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