July 26, 2023
July 26, 2023
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5 - 3 votes
Once a business is up and running, and one or more owners want to transfer ownership, the way to transfer ownership will vary depending on the business structure. Furthermore, in Canada, there are three different ways to organize a business: sole proprietorship, partnership, and incorporation.
"Ownership interest" means an owner's interest in an entity. The term includes the owner's share of profits and losses or similar items and the right to receive distributions. The term does not include an owner's right to participate in management.
A sole proprietorship is the least formal business structure: it is a business with a single owner who alone is responsible for all the business' liabilities. More importantly, a sole proprietorship has no formal business structure (in other words, often no formal documents filed with government) and in practice that often means that little paperwork is required to transfer ownership of the business.
The first step in transferring ownership of a sole proprietorship is to ensure that the personal assets and liabilities of the sole proprietor are separate from the assets and liabilities of the business. This may not always be the case because many individuals choose a sole proprietorship exclusively because the structure is a lot more relaxed than other business forms. However, any buyer will want to ensure that they can properly value the assets of the business and therefore keeping them separate is critical.
Once the assets and liabilities of their business are separate from the assets and liabilities of the sole proprietor, the next step in this sale will be to get a proper valuation of the business.
Valuation is the estimation of something's worth, usually carried out by a professional appraiser. In the case of a business, it will involve adding up the assets (tangible and intangible) and subtracting the liabilities.
Tangible assets are an items of economic, commercial, or exchange value that have a material existence. Tangible assets are also known as physical assets.
Intangible assets are items of economic, commercial, or exchange value that are not physical in nature, such as goodwill, brand recognition, patents, trademarks, and copyrights. Intangible assets are also called non-physical assets.
Liabilities are defined as a company's legal financial debts or obligations that arise during the course of business operations.
After the business is valued, the parties will need to agree on a price. With a sole proprietorship, even after a valuation, this is a little bit more difficult than with other business structures, but a good valuation can really help. Once the parties have agreed on a purchase price of the business, generally a written sales agreement will be involved to ensure both of the parties know exactly what to expect and what is being transferred over in terms of the sale.
After the written agreement is signed, the seller will need to ensure that everything the buyer needs to run the business is properly handed over. The seller must also close the business number and all of the Canada Revenue Agency (CRA) program accounts. The new owner will have to get a new business number and new CRA program accounts for the business.
Steps to transfer ownership of a sole proprietorship:
1. Separation of assets;
2. Valuation;
3. Sales agreement, if applicable;
4. Modification of the business number and the CRA program accounts.
There are essentially two forms of partnerships: general and limited partnerships.
A general partnership is a business arrangement between two or more individuals who share the profits and liabilities of a business. In a general partnership, each partner is fully personally liable for the debts, contractual obligations and torts resulting from the partnership's operation. There are three essential elements to a general partnership:
1. a sharing of profits and losses,
2. a joint ownership of the business, and
3. an equal right in the management of the business.
A limited partnership is an arrangement where a limited partner can contribute financially to the business without being involved in the affairs of the partnership. As a limited partner, liability to the partnership or its creditors is limited to the amount invested. Limited partners are sometimes referred to as 'silent partners', as they contribute capital, but do not share in the management or liabilities of the partnership.
A change of partners will have a different impact on the business depending on the Partnership Agreement and whether or not the business was registered using the legal names of each partner or the provincially registered partnership operating name.
A change of transfer ownership in the case of partnership is governed by the Partnership Agreement, which will usually describe exactly how the partnership interest may be transferred.
Commonly, the clause regarding the transfer of a business in a Partnership Agreement will often state that the party wishing to sell must offer their ownership interest to the other partner or partners first before selling to an outside party ("right of first refusal"). For limited partners, the sale will often be a little bit easier because they are only involved to the extent of their financial contribution.
A general partner or a limited partner selling their interests will undergo a valuation process; the Partnership Agreement may cover exactly how the interest should be valued. The parties may need to default to a neutral, third-party valuation expert.
Once the ownership interest has been valued, it can be sold. The buyer and seller of the interest may choose to finalize the sale through another document, as well, specific to the sale of interest.
No matter what type of partnership is involved, the Partnership Agreement will have to be amended to reflect the change in ownership.
In some cases, depending on the Partnership Agreement, if the partners change, the business is considered a new legal entity and requires a new business number (BN) and new CRA program accounts.
Steps when transferring ownership of a partnership:
1. Verification of the partnership agreement as it may govern the transfer of business ownership;
2. Valuation of the interest being transferred;
3. Execution of an interest sale agreement, if applicable;
4. Amendment to the partnership agreement;
5. Modification of the business number and the CRA program accounts.
A corporation is the most common form of business organization in Canada. A corporation is a legal entity, separate in law from its owners the shareholders. A corporation can own property, carry on business, possess rights, and incur liabilities separate from its shareholders. Although the shareholders own the corporation through their shareholdings, they do not own the property belonging to the corporation, nor are the rights and liabilities of the corporation passed through to the shareholder.
The shareholders are the individual entities who own "shares" in a corporation; they can be individuals or corporations themselves. Shares are representative of ownership, so the shareholders are the actual owners of the corporation. Therefore, to transfer ownership of a corporation means to transfer shares.
Through a Shareholders Agreement, the corporation and the shareholders agree to the bounds of the relationship between them. Within these agreements, the corporation lays out its expectations of the shareholders' behaviour and obligations and the shareholders establish the set up for the major players in the corporation - these major players include the shareholders themselves and the directors.
To transfer ownership of a corporation, the first step is to validate owner information with the federal or provincial registry. Provincial and federal governments have business directories where this information may be found.
In Canada, both provincial and federal statutes govern corporations. Therefore, a corporation may be registered either at the provincial level or at the federal level.
The Shareholders Agreement or the corporate bylaws may restrict how the shares can be sold: they may need to be offered to existing shareholders first, for example. If that's the case, then the terms of the Shareholders Agreement will govern the transfer of shares and any new shareholder, if a new one comes in, will need to execute and abide by that Shareholders Agreement as well.
A share sale and purchase agreement may be used, depending on the parties for the transfer of the shares. Shares are usually valued by their current market-value if the shares are publicly traded or may need to be valued. The transfer of shares will be accompanied by the transfer of share certificates, which are hard copy documents evidencing who owns the shares.
Steps when transferring ownership of a corporation:
1. Validation of the owner information;
2. Determination of whether the Shareholders Agreement and the corporate bylaws allow transfer of the shares to the potential buyer;
3. Execution of a share sale purchase agreement, if applicable;
4. Transfer of share certificates.
1. Do the business documents (Partnership Agreement, Shareholders Agreements or Corporate Bylaws) allow for a transfer of ownership?
2. What is the value of the business interest being transferred? Should a professional valuation be considered?
3. What is the relevant written agreement needed for the sale?