What Are the Types of Business Ownership and How Can You Transfer It? 

Owning a business can take different forms, including partnerships, sole proprietorships, cooperatives, or corporations. Business ownership is crucial in entrepreneurship as it determines your control level or liability over an endeavor. Whether it is a limited liability or a sole proprietorship company, knowing how to transfer ownership is helpful, especially if there is a need for the holders to remove themselves without closing the business. 

When considering how to transfer ownership, one consideration is the legal and financial implications, which vary per the transactions or business structure type. 

What is Business Ownership?

In simple terms, the definition of business ownership refers to having control and legal rights over a company or business entity. Owners have the authority to make decisions, bear liabilities, and enjoy profits. Depending on the structure, business ownership grants rights to manage operations, hire staff, and comply with legal and financial responsibilities. It’s important to understand the different forms of business ownership, as each type affects the owner’s liability, tax obligations, and control over the business.

How Does Business Ownership Work?

Due to the changing economic and social landscape, business ownership has developed over time. Centuries ago, businesses were controlled by families or individuals, but the legal framework detailing the owner's rights was rudimentary. In the 18th century, though, industrialization brought the limited liability entities that became the new form of ownership. It became popular among corporations, though other alternative forms of ownership have become acceptable and mainstream. 

Currently, business ownership is the legal and financial control over a for-profit entity. Business owners have the authority to make operational decisions and assume liabilities in exchange for enjoying profits. However, they also bear the responsibility of getting the right business licenses and potentially bear any losses made. Depending on the structure, the business owner also has the right to manage resources by hiring and dismissing their workforce. 

What Are the Types of Business Ownership?

There are several business ownership types, each with unique advantages and disadvantages. Here are the most common forms:

1. Sole Proprietorship: A single individual owns and controls the business, taking full responsibility for its debts and liabilities but also enjoying full control over decision-making.
2. Partnership: Involves two or more individuals who share ownership, profits, and losses. Partnerships can be general or limited, affecting liability and management roles.
3. Limited Liability Company (LLC): This hybrid structure offers the flexibility of a partnership with the liability protection of a corporation. Members are not personally liable for business debts, and profits are passed through to avoid corporate taxes.
4. Corporation: A corporation is a separate legal entity owned by shareholders. It provides the strongest liability protection but may involve more complexity, including corporate taxation.
5. Cooperative: Owned and operated for the benefit of its members, who share decision-making authority and profits equally.
6. Franchise: A franchise allows an individual to operate a business under an established brand, following specific guidelines in exchange for brand recognition and support.

What is the Best Form of Business Ownership?

The best form of business ownership depends on various factors, including business size, the owner’s financial goals, risk tolerance, and long-term objectives. For small businesses with low risk, a sole proprietorship may be the best option. However, larger businesses requiring liability protection or investment might benefit from forming an LLC or corporation. Consulting with a legal or financial expert can help determine the best structure based on individual needs.

What Do Business Owners Consider When They Select a Business Ownership Structure?

When choosing a business ownership type, owners typically consider factors like liability protection, taxation, management control, and the ease of changing ownership. Financial needs, growth potential, and regulatory compliance also play significant roles in the decision-making process. The right structure can depend on whether the business is new, growing, or well-established.

How to Transfer Business Ownership?

Transferring or changing business ownership business ownership will depend on the structure in place. There are a few common methods for transferring ownership, each with its own legal and financial considerations:

• Selling the Business: Selling all or part of the business to another individual or company.
• Leasing the Business: Leasing the business temporarily with the possibility of a future sale.
• Gifting the Business: Transferring ownership without monetary exchange, typically to family or friends.
• Merging with Another Business: Combining with another entity, often transferring ownership to the new organization.
• Reapportioning Ownership Among Partners: Shifting ownership shares among partners in a partnership or LLC.

The most common way to change business ownership is by selling it to another individual or a company. If several partners own the business, it may be reapportioned. The other approach is to lease the business. 

There may be complex financial, taxation, and legal obligations if one transfers business ownership from one LLC to another or from a sole owner. It would mean consulting a lawyer to ensure you comply with all legal requirements. That also ensures appropriate transfer of business ownership agreements have been filled.

Selling a Business

Valuation is necessary if a sole owner owns the business so both parties can agree on the price. A business may be sold by cash or via lending financing. For these cases, the purchaser pays the company either from their account reserves or through a loan. Business may also be sold by owner financing. In this case, the owner finances a sale rather than a lender. The buyer pays for the ownership over time per the terms the seller sets. Selling part or all of the businesses’ attributes like contractual obligations, property, client lists, or the business name is possible.

Business Leasing

The other alternative one may consider is to lease their business to buyers. Some buyers prefer this option to determine if the business is a good fit for them. The seller would create a lease-to-purchase agreement initially and offer it to buyers. They could also wait until the end of the lease period before moving ahead with a traditional sale. Once the lease has expired, the buyer is forced to decide whether they would like to renew it or terminate the endeavor. 

However, This approach provides freedom to explore career and entrepreneurial approaches without committing to giving up the business. It also provides the seller time to find the perfect owner for their business. 

Gifting Business

Though rare, ownership may also transfer to another party by gifting. If the buyer wants to hand the business over to family members or close friends, they can do so without requiring money in exchange. There are two ways to do this, though: gifting the business in small increments or including it in the will. The former approach is optimal if the goal is to pass it on to the target party while the buyer is still alive. It is also possible to avoid taxes by transferring a value under $16,000 per individual per year. 

The lifetime ceiling for the gift, though, is $12.06 million without being taxed. Alternatively, you may transfer a part or all of the business to beneficiaries in a will. The will is executed on the death of the giftor. Similarly, beneficiaries who receive amounts below $12.06 million will be exempt from taxation. 

Merge with another Business

It is also possible to transfer the business by merging with another or facilitating an acquisition by another. This approach may be of benefit if there are clients that require ongoing attention. The new company then continues to offer the same products or services desired by the customer base. This approach is sometimes sensitive as it may involve a hostile takeover of one business by another. However, the larger or acquiring corporation typically wins most of the decision-making ability. 

Reapportion Ownership among Partners 

If you have a partnership or a limited liability company, it is possible to transfer the ownership of the business by adding partners that will pay for their interests. Partnership structures are usually guided by an agreement allowing or restricting the transfer of shares. The members of the partnership are required to follow the terms of the agreement. If it is in the agreement, one of the partners may be able to transfer ownership via profits, voting rights, and other responsibilities. 

After purchasing most of the share capital, the partners will become the new owners. For limited liability companies, the owners are considered members and pay for a percentage of ownership rights. Most are administered via an operating agreement and the articles of the company. Individuals can get ownership by buying into the company. They should check asset records and consider the regulations set in the company constitution. Similarly, the other members also must agree to the transfer, and the process must follow state laws. 

Business ownership entails the rights and responsibilities a person has over their venture. It depends on the structure of the business, as there are sole proprietorships, partnerships, joint ventures, and limited liability corporations. There are five common ways of transferring ownership, including sale, leasing, reapportion among partners, merging, and gifting the ownership. The transfer of business ownership should adhere to the business type’s regulations. If you need more information on the transfer of ownership, please check our landing pages and guides.