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Transferring Ownership of Small Businesses: Contract Considerations
Most often, small businesses are transferred through a sale/purchase, but there other circumstances in which ownership is transferred that do not involve a sale/purchase. Such include:
- Transferring partial or full ownership of a family-run business to a spouse or new members of the family
- Adding new owners/partners who may end up with a controlling interest
- Transferring ownership to a family or living trust as part of estate-planning
- Intra-corporate transfers between parent and affiliated corporations and/or limited liability companies
- And more
This article discusses a few of the legal issues that must be considered when any sort of ownership transfer is made, whether via sale/purchase or one of these other transfer mechanisms. You should seek advice and counsel from a good San Diego corporate attorney to ensure compliance with laws and your contracts.
San Diego Corporate Law: Transfer of Beneficial Ownership as Default
In some contracts, particularly financing and investment contracts, there are provisions that any transfer of beneficial ownership of the company constitutes or will be deemed a default under the agreement. In addition, there are often provisions requiring notice before the transfer is made. Note the importance of the words “beneficial ownership.” When business ownership units are transferred to a living or family trust, such rarely transfers the actual control of the business and most recognize such transfers as estate-planning maneuvers. As such, those types of ownership transfers do not generally trigger the transfer-as-default provisions. However, you need to have experienced corporate counsel review your contracts for clauses. Depending on the circumstances, the transfer may not generate a concern with the other contracting parties, or if it does, a resolution can be negotiated.
If there is a concern, one solution is to effectuate the transfer in phases. The first phase or phases bring in the new owner, but at only partial ownership. This can build experience, trust, and familiarity so that, when the final transfer is made, the transition is smooth.
San Diego Corporate Law: Three Key Factors
What should be clear from the foregoing is that your contracting partners are likely most concerned with three factors:
- Voting shares or ownership units
- Change of control
- No consideration paid for the transfer or less than market-value paid
Thus, transferring non-voting stock or ownership units to children or grandchildren will rarely raise concerns (but beware gift-tax limits and liabilities). Likewise, if less than a controlling interest in the business is transferred and there is no change-in-control, then any third-party concerns will be lessened. Finally, if there is no consideration paid or if the consideration paid is less than fair market value, the transfer can be challenged on the basis of an intent to defraud creditors or avoid liabilities. However, those concerns only arise if, in fact, obligations and liabilities are not satisfied.
Contact San Diego Corporate Law
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides legal services related to business law, private securities offerings/sales, the sale/purchase of a business, and for mergers and acquisitions. Mr. Leonard can also assist with other types of ownership transfers and with setting up a new corporate entity, annual corporate maintenance, and can help review and draft business contracts. Mr. Leonard can be reached at (858) 483-9200 or via email.
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