Small Business

Smart Ways to Transfer a Business


My fianc?e and I are taking over his mother's hair salon. The hair salon is set up as an S-corporation. What is the simplest way to transfer the company to us? Will there be any fees or penalties incurred in the transfer? —J.R., Palm Harbor, Fla.

There are several different ways you could structure this transaction, but the simplest one may not turn out to be best for everyone involved. Your tax bracket and those of your fiancée and his mother, as well as her total wealth and the salon's value, are details that will influence your strategy as you jointly make the decision based on guidance from your accountant, attorney, or both. The method you choose will determine what fees and other costs will be associated with this transaction. Having a professional shepherd the process should insure that all parties comply with filing and regulatory requirements, so that no penalties are incurred.

In terms of keeping the documentation simple, the easiest thing would be for you and your fiancée to enter into a purchase and sale agreement for either the S-corporation stock or its assets, says Julia Caputo Stift, an attorney at the Los Angeles law firm of Nossaman, Guthner, Knox & Elliott. Other possibilities include having the current owner transfer the business to her son as a gift, or convert it from an S-corp to a limited partnership or limited liability company before or during the transfer.

CONSIDER YOUR GOALS. All three of you will need to think about your goals for this transaction, Stift says, so that a professional can help most effectively with the business agreement between you, your fiancée, and your future mother-in-law. You will all want to minimize your current and future state and federal income tax consequences, of course.

But you and your fiancée will also want to protect yourselves from liability and permit the smooth operation of your new business. Some additional issues you'll need to consider include how much—if anything—you and your fiancée will be paying your mother-in-law, for how long, and the current assets and liabilities of the salon.

"Whether you are paying for the business upfront, taking out a loan from a lender, or paying your mother-in-law for the business over a period of years will impact the documentation requirements and tax consequences," Stift notes. "Whether liabilities of the business can be transferred and to what extent their transfer will constitute payment for the hair salon must also be evaluated. The transferability of assets, such as leases or real property held by the business, also can impact the most desirable transaction structure."

ASK AN ATTORNEY. You should know that the most advantageous transaction structure for you and your fiancée may not be the same as the most advantageous transaction structure for your future mother-in-law, so some compromise may become inevitable. This is another issue you'll need to go over with your attorney, who may determine that based upon your relationships you're all capable of giving informed, written consent for him or her to represent all of you in documenting your goals. Some attorneys, however, might feel that they cannot ethically represent all three of you if you have different goals for this transaction.

Brian Liu, co-founder and CEO for LegalZoom.com, an online legal document service, says that you should not have difficulty finding an attorney who can handle this job. Ask other entrepreneurs for referrals to local business attorneys or check out online sites such as www.casepost.com or www.handelonthelaw.com.

"It doesn't need to be too expensive," Liu says. "A stock sale can be a fairly simple transaction between interested parties and the underlying paperwork does not have to be laborious or complex." Good luck!


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