Considering Transferability when Selecting a Business Structure
Aug. 9, 2021
New business owners have many decisions to make, from choosing a business name to how day-to-day operations will be run. Selecting a business form is one of the most important decisions, with many factors influencing your choice. Transferability – how ownership of the business changes hands – is one of those factors.
The simplest and most common business form, a sole proprietorship cannot be sold as an entity. Because the individual is the business, only the assets can be sold, both tangible and intangible. The old proprietorship terminates with the sale.
Typically, a partnership agreement will control the transferability of interests in a partnership. Drafting a well-thought-out agreement is critical to any later transfer going smoothly. To ensure the partnership agreement accurately reflects the intent of the partners, it should be written with the assistance of a knowledgeable professional. In the absence of a partnership agreement, any transfer can only occur with the consent of all partners and is controlled by the Texas Business Organization’s Code (TBOC).
Limited Liability Company
Transferability for an LLC works similarly to that of a partnership. The operating agreement will set the rules for any future transfer of interest and, in its absence, transfers are controlled by the TBOC.
The interests of corporate shareholders are usually freely transferable. Sometimes, however, restrictions are placed on the transferability of shares via the shareholder agreement or the TBOC. An agreement can be particularly important to providing protections to minority shareholders.
Common transfer restrictions include mandatory buy-sell agreements, which can mandate the sale of shares in specific situations such as the death or disability of a shareholder. Or a first option buy-sell agreement, which allows other shareholders or the corporation to buy shares in preference to third parties.