To transfer a business to someone else, you choose a deal structure (asset sale, entity sale, merger, or gift), sign a purchase agreement along with a bill of sale and any assignment documents, amend the company’s internal governing documents, file the ownership change with the Secretary of State, notify the IRS of the new responsible party, move licenses and intellectual property into the new owner’s name, and report the tax consequences on the correct forms. The order matters, and so does the structure you pick at the start: it drives who inherits which debts, which taxes get paid at which rates, and how much paperwork the deal generates.
Pick a Transfer Structure First
Every other step downstream depends on this choice. There are four common paths.
Asset Sale
The buyer picks which pieces of the business to acquire (equipment, inventory, customer lists, intellectual property) and leaves unwanted liabilities behind with the seller. Anything not listed on the schedule of transferred assets stays with the seller, so the schedule has to be exhaustive. Buyers usually prefer this path because they can avoid hidden debts and pending lawsuits, and they get a stepped-up tax basis in what they buy. Sellers often face less favorable tax treatment on certain categories, which is why price negotiations tend to revolve around how the total purchase price is allocated among asset classes.
Entity Sale
Here the ownership interests change hands directly: LLC membership units, or shares of stock in a corporation. The business keeps operating as the same legal entity, with the same tax ID, contracts, debts, and regulatory permits. Vendor agreements, leases, and licenses generally stay in place unless a contract contains a change-of-control clause that requires consent. The tradeoff is that the buyer inherits everything, disclosed or not, so due diligence matters more in an entity deal than in any other structure.
Merger
A merger combines two entities into one. The surviving company absorbs the rights, property, and obligations of the entity that disappears. State law governs how shares are exchanged, what happens to dissenting shareholders, and which entity survives. Debts and contracts transfer automatically to the survivor.
Gift or Family Succession
You can transfer a business without a traditional sale price, most often between family members or long-time partners as part of an estate plan. The transfer still needs formal documentation showing the new ownership percentages, voting rights, and profit distribution. For 2026, you can gift up to $19,000 per recipient per year without triggering gift tax, and the lifetime gift tax exemption is $15,000,000.1Internal Revenue Service. What’s New – Estate and Gift Tax Gifts above those thresholds don’t automatically create a tax bill, but they require filing IRS Form 709 and reduce the remaining lifetime exemption.
Value the Business and Do Your Diligence
Before signing anything, both sides need a clear picture of what the business is worth and what comes attached to it. This is where deals fall apart after closing when it gets skipped.
Start with a valuation. That means analyzing financial statements, cash flow projections, comparable sales of similar businesses, and the value of intangibles like brand recognition or customer relationships. Buyers should verify the seller’s numbers independently rather than accept the seller’s own valuation.
Build two schedules. One is a complete asset inventory covering tangible property (equipment, vehicles, furniture) and intangible property (patents, trademarks, trade secrets, customer databases). The other is a schedule of liabilities disclosing every outstanding debt, loan, lease obligation, and pending or threatened lawsuit. Together these documents are the financial spine of the purchase agreement.
Buyers should also run a lien search through the state’s UCC filing office to identify secured creditors with claims against the business’s assets. A UCC-1 financing statement means a lender has a security interest in specific collateral, and buying those assets without clearing the lien can mean losing them. Search under the exact legal name and common variations, because even small differences in punctuation can cause filings to be missed.
If the business owns or leases real property, a Phase I Environmental Site Assessment protects the buyer from inheriting contamination liability. Under federal law, conducting “all appropriate inquiries” before acquiring property is a prerequisite for asserting an innocent landowner defense to environmental cleanup claims. Skip this step and the buyer can be on the hook for contamination that predates the sale by decades.
You can also verify the seller’s tax standing by requesting a business tax transcript from the IRS, which confirms the EIN, filing requirements, and whether returns have been filed.2Internal Revenue Service. Get a Business Tax Transcript A third party with proper authorization on Form 2848 or Form 8821 can request it through the IRS Practitioner Priority Service Line.
Sign the Documents That Move Ownership
Purchase Agreement
The purchase agreement is the central contract. It identifies the buyer and seller, states the purchase price, lays out what’s being transferred, records the representations the seller makes about the business’s condition, sets which warranties survive closing, and includes the indemnification provisions that protect the buyer if undisclosed liabilities surface later. Both parties sign it, and it becomes the binding roadmap.
Good purchase agreements also address post-closing covenants. Non-compete clauses are standard in business sales, preventing the seller from opening a competing business and pulling away the customers the buyer just paid for. The FTC’s proposed rule banning most non-compete agreements includes a specific exception for non-competes entered into as part of a bona fide sale of a business or ownership interest.3Federal Trade Commission. Noncompete Rule That rule is currently not in effect due to a federal court order, but business-sale non-competes would remain enforceable even if it eventually took effect.
Bill of Sale and Assignments
The bill of sale transfers ownership of tangible personal property: equipment, vehicles, furniture, inventory. Descriptions should be specific enough that there’s no ambiguity about what changed hands. Intangible assets like trademarks, patents, and copyrights need separate assignment documents. If the business operates from leased space, an assignment of lease (with the landlord’s written consent) gives the new owner the right to stay under the existing terms.
Amend the Internal Governing Documents
The operating agreement (LLC) or bylaws (corporation) need formal amendments reflecting the ownership change. These record the date the previous owner withdrew, the date the new owner was admitted, the updated ownership percentages, and any changes to voting rights or profit distributions. Members or directors vote to approve the amendments however the existing governing documents require. The internal records need to match what you file with the state.
Report the Asset Allocation to the IRS
In an asset sale, both buyer and seller must file IRS Form 8594, the Asset Acquisition Statement, with their tax returns for the year of the sale.4Internal Revenue Service. About Form 8594, Asset Acquisition Statement Under Section 1060 The form reports how the total purchase price was allocated among seven classes of assets. That allocation drives the buyer’s future depreciation and amortization deductions and controls how the seller’s gain is characterized.
Federal law requires both parties to allocate using the residual method: fill lower-numbered classes first before any value flows to higher classes.5Office of the Law Revision Counsel. 26 U.S. Code 1060 – Special Allocation Rules for Certain Asset Acquisitions If the buyer and seller agree in writing to an allocation, that agreement binds both sides unless the IRS determines it isn’t appropriate.
The seven classes on Form 8594 are:
- Class I: Cash and bank deposits
- Class II: Actively traded securities and certificates of deposit
- Class III: Debt instruments and accounts receivable
- Class IV: Inventory
- Class V: All other tangible and intangible assets not in another class (furniture, equipment, buildings, land)
- Class VI: Section 197 intangibles other than goodwill (patents, customer lists, covenants not to compete)
- Class VII: Goodwill and going concern value
Part I collects identifying information for both parties (names, addresses, TINs) and the date of the sale. Part II records total consideration and the allocation across all seven classes. If the allocation changes later because of a purchase price adjustment or earnout, both parties file a supplemental statement using Part III.6Internal Revenue Service. Instructions for Form 8594 (Rev. November 2021) Filing inaccurate information can trigger penalties under Sections 6721 through 6724 of the tax code.
Understand What Each Side Will Owe
Allocation controls the tax bill, and buyer and seller have opposing interests. Knowing the mechanics helps you negotiate.
The Seller’s Side
The seller’s gain on each asset is the difference between the allocated sale price and the seller’s adjusted basis in that asset. Different categories get taxed differently:
- Gain on depreciable personal property (Section 1245 property) is taxed as ordinary income up to the amount of depreciation previously claimed. That recapture is taxed at the regular income rate, not the capital gains rate.7Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
- Gain on assets held longer than one year, including goodwill in Class VII, qualifies for long-term capital gains rates of 0%, 15%, or 20% depending on income.
- Gain on inventory is ordinary income.
Sellers prefer allocating more of the price to goodwill and long-term capital assets. Buyers prefer the opposite, since a heavier allocation to depreciable assets generates larger deductions in future years.
The Buyer’s Side
The buyer’s allocation sets the starting tax basis for each acquired asset. Equipment and furniture can be depreciated over their useful lives, or deducted immediately under Section 179 if eligible. Goodwill and most other Section 197 intangibles, including trademarks, customer-based intangibles, and covenants not to compete, must be amortized over a fixed 15-year period.8Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
Paying Over Time
When the buyer pays over time rather than in a lump sum, the seller can report gain using the installment method, spreading the tax across the years payments arrive.9Office of the Law Revision Counsel. 26 U.S. Code 453 – Installment Method Two exceptions matter: inventory cannot be reported on the installment method, and depreciation recapture must be recognized as ordinary income in the year of sale regardless of when payments actually come in. Only the gain above the recapture amount gets spread out.
Update State Records
The ownership change needs to appear in the state’s public records. Depending on what changed, you file Articles of Amendment or a Statement of Change with the Secretary of State (or equivalent agency). Most states allow online filing through a business portal: select the entity, upload the signed documents, pay the processing fee. Fees and processing times vary by state. Once accepted, the state issues a stamped copy or certificate of amendment.
Every state treats false information seriously. Submitting documents you know to be false can lead to rejection, financial penalties, or criminal liability for perjury depending on the jurisdiction. Watch the email address on the filing for rejection notices or requests for more information.
Notify the IRS of the New Responsible Party
When the person who controls the business changes, you must notify the IRS by filing Form 8822-B within 60 days.10Internal Revenue Service. Form 8822-B, Change of Address or Responsible Party – Business The form asks for the EIN and the name and Social Security Number of the new responsible party. Mail it to the IRS service center listed in the instructions based on the business’s location.
There’s no financial penalty for filing late, but the practical consequences are real. If the IRS doesn’t have current information, tax notices and deficiency letters go to the old address or old responsible party, and penalties and interest keep running whether anyone reads those notices or not.11Internal Revenue Service. Form 8822-B, Change of Address or Responsible Party – Business Filing promptly is one of the simplest steps in the whole process.
Move the Licenses, Permits, and Trademarks
Operating Licenses and Permits
Business licenses and professional permits are issued to a specific person or entity, so a change in ownership usually means the new owner either transfers the existing license or applies for a new one. Contact the issuing agency, whether it’s a state licensing board, municipal clerk, or health department, to find out what’s required. Expect to provide a copy of the purchase agreement, proof of the new owner’s qualifications, and a fee. Some licenses have additional regulatory review that can take months; liquor licenses are the classic example.
Trademarks and Patents
If the business owns registered trademarks, the ownership change must be recorded with the U.S. Patent and Trademark Office through its Assignment Center. Online filing records the change in under a week; paper filing takes about 20 days.12United States Patent and Trademark Office. Trademark Assignments: Transferring Ownership or Changing Your Name The recording fee is $40 for the first trademark in a document and $25 for each additional mark in the same document.13United States Patent and Trademark Office. USPTO Fee Schedule – Current Patent assignments use a similar recording process. Failing to record doesn’t invalidate the transfer between the parties, but it can create problems if ownership is later disputed.
Handle Employees and Benefits
Deal structure determines what happens to the workforce. In an entity sale, employees generally remain employed by the same legal entity under the same terms. In an asset sale, employees technically work for the seller’s company. The buyer decides which employees to hire into the new operation, and those employees start fresh for seniority, benefits eligibility, and similar metrics unless the buyer agrees otherwise.
If the business has 100 or more employees, the federal WARN Act requires 60 days’ advance notice before a plant closing or mass layoff. In a business sale, the seller is responsible for WARN notice for any layoffs up to and including the closing date, and the buyer takes over that responsibility afterward.14eCFR. Part 639 – Worker Adjustment and Retraining Notification Many states have their own mini-WARN laws with lower employee thresholds and longer notice periods.
Retirement Plans
If the seller sponsors a 401(k) plan, the buyer has three options: terminate the plan before closing, merge it into the buyer’s plan after closing, or maintain it as a separate plan. Termination is the most common approach in asset sales because it avoids inheriting any plan compliance issues. Terminating requires fully vesting all participant accounts and giving employees the choice to take a distribution or roll over their balances. Merging preserves retirement assets and avoids the administrative burden of termination, but the buyer needs to amend its own plan to count prior service with the seller for eligibility and vesting.
Unemployment Tax Experience Rating
Every state maintains an experience rating for employers that sets their unemployment insurance tax rate. When a business changes hands, the new owner’s rate depends on whether the state transfers the seller’s rating. All 50 states plus DC and Puerto Rico have provisions for transferring experience ratings, though FUTA doesn’t require it.15U.S. Department of Labor. Transfers of Experience for Employer Rates In a total acquisition, transfer is mandatory in most states. In a partial acquisition, it’s often discretionary or based on what percentage of the predecessor’s payroll the buyer absorbed. A seller with a favorable rating (low layoffs, low tax rate) should negotiate to ensure the rating transfers.
Insurance, Successor Liability, and Bulk Sales
The buyer needs its own insurance coverage effective on the closing date: general liability, commercial property, workers’ compensation, and any industry-specific policies. If the seller’s policies are claims-made (common for professional liability and errors-and-omissions coverage), the seller should buy tail coverage, an extended reporting period that lets claims arising from past work be submitted after the policy expires. Tail policies typically extend coverage for one to five years, though buyers in acquisition deals sometimes require six years or more.
In an asset sale, the buyer generally does not inherit the seller’s liabilities. Courts recognize several exceptions that can pierce that protection, though: express or implied assumption of liabilities, a de facto merger, the buyer being essentially a continuation of the seller’s business, or a transfer designed to defraud creditors. Clear contractual language in the purchase agreement is the best defense against these claims.
A handful of states still enforce bulk sales laws derived from UCC Article 6, which require the seller to notify creditors before transferring a large portion of business assets outside the ordinary course of business. Notice periods run roughly 10 to 45 days before the transfer. Failing to comply can make the sale voidable by the seller’s creditors. Most states have repealed their bulk sales statutes, but check the seller’s state if you’re doing an asset deal.
Close and Follow Through
At closing, both sides sign the purchase agreement, bill of sale, assignment documents, and any other transaction paperwork. The buyer delivers the purchase price or the initial installment, and the seller delivers possession. Many deals use an escrow agent to hold funds and documents until every condition is satisfied, then release everything at once.
An escrow holdback, where part of the purchase price stays in escrow for several months after closing, is standard. It gives the buyer a source of funds to cover indemnification claims if undisclosed liabilities or breaches of the seller’s representations show up later. The holdback amount and release schedule belong in the purchase agreement.
After closing, update every account and registration: bank accounts, utility accounts, vendor agreements, insurance policies, the business’s domain registration, and any remaining government filings. The first few weeks after a transfer are when things slip, and each missed update compounds into a bigger operational problem the longer it goes unresolved.