Exiting a business is a major undertaking that requires careful planning and the proper legal documentation to ensure a smooth transition. For business owners who sell or transfer their business, legal agreements are essential to outline the terms and conditions of the transaction.
Whether a business owner is selling, transferring, or closing their business, the right legal forms help protect assets, minimize liabilities, and comply with legal obligations.
This article outlines the key legal forms business owners may need when exiting their business, which depending on their chosen exit strategy, can include: (i) business sale & transfer forms, (ii) dissolution & closure forms, (iii) ownership transfer & succession forms, and (iv) employee & contractual forms.
1. Business Sale & Transfer Forms:
Exiting business owners can either sell the assets or the stock of the business:
A. Asset Purchase Agreement (APA:)
An Asset Purchase Agreement is used when selling specific assets of the business rather than the entire entity. Asset Purchase Agreements define the purchase price, payment terms, and liabilities assumed by the buyer for the business’ equipment, inventory, intellectual property, and customer lists, and resulting in a higher tax consequence to the seller.
An Asset Purchase Agreement is advantageous to the buyer because the business is valued at fair market value and the buyer can take a higher depreciation expense.
B. Stock Purchase Agreement (SPA:)
Stock Purchase Agreements are used when selling the business as a whole entity (corporation or LLC.) Using a Stock Purchase Agreement, the business owner transfers ownership of company shares rather than individual assets and the buyer assumes all assets and liabilities of the company.
A Stock Purchase Agreement are advantageous to the seller, because the sale of stock is taxed at the business owners individual tax rate. Of course, there are many strategies like the Qualified Small Business Stock Exclusion, Installment Sales, Gifting, and various Trust Planning to minimize a seller’s tax consequences.
C. Business Bill of Sale:
A Business Bill of Sale is a simplified document proving the transfer of ownership. It typically accompanies an APA or SPA and serves as evidence of the sale for tax and legal purposes.
D. Buy-Sell Agreement:
Often used in partnerships and corporations when an owner exits, a Buy-Sell Agreement defines how ownership shares will be sold or transferred in cases of retirement, disability, or death and helps prevent disputes among remaining owners.
2. Dissolution & Closure Forms:
When a business is closing permanently, owners must legally dissolve the entity and settle any remaining obligations.
A. Articles of Dissolution:
Articles of Dissolution officially terminate a corporation or LLC with the state. Articles of Dissolution prevent continued tax and regulatory obligations and are required for both voluntary and involuntary dissolutions.
B. Notice of Business Closure:
A Notice of Business Closure informs creditors, vendors, customers, and employees of the closure and helps settle outstanding debts and fulfill final contractual obligations. Certain states and industries require a Notice of Business Closure filing.
C. IRS Form 966 (Corporate Dissolution or Liquidation:)
IRS Form 966 Corporate Dissolution or Liquidation is required for corporations dissolving to comply with federal tax reporting regulations.
D. Final Tax Returns & Employment Tax Filings:
Business owners must complete several final filings to prevent tax penalties from the IRS, including final income tax returns (e.g., IRS Form 1120 for corporations, Form 1065 for partnerships,) and final payroll tax forms (Form 941, W-2s, and 1099s.)
3. Ownership Transfer & Succession Forms:
For businesses with succession plans, these legal documents ensure a smooth transition to new ownership.
A. Business Succession Agreement:
A Business Succession Agreement outlines how ownership will transfer in family businesses or internal leadership transitions. This agreement often includes a timeline and training period for successors.
B. Trust Agreements:
Trust Agreements are used when a business owner places ownership in a trust for future heirs. Trust Agreements ensure continuity while avoiding probate court.
C. Power of Attorney (POA:)
A POA grants authority to a trusted person to manage business affairs during a transition and is especially useful in cases of illness, incapacity, or temporary absence.
4. Employee & Contractual Exit Forms:
Exiting a business also involves handling employee relationships and contracts properly.
A. Employee Separation Agreements:
Employee Separation Agreements are used when closing a business or downsizing. These agreements outline final wages, severance pay, and benefits and help protect against wrongful termination claims.
B. Assignment of Contracts:
Assignments of Contracts transfers existing vendor, lease, and client contracts to a new owner, ensure continuity, and prevent contract breaches.
In conclusion, exiting a business requires proper legal documentation to ensure compliance, financial security, and a smooth transition. Whether selling, transferring, or closing a business, using the right legal forms protects owners from future liabilities and streamlines the process.
Before finalizing any exit, business owners should consult with a legal or financial professional to ensure all required forms are correctly prepared and filed. Depending on the type of exit, other legal documents not mentioned here could also be involved.
About Greater Prairie Business Consulting, Inc.:
Greater Prairie Business Consulting, Inc. is an award-winning, national consulting practice serving entrepreneurs, small to mid-sized privately held and family-owned businesses and middle market companies of any type with revenues between $1 million and $250 million. The firm helps small, mid-sized, and middle market companies maximize their performance and exit.
Greater Prairie Business Consulting, Inc. can be reached by calling 1-800-828-7585 or emailing info@gpbusinesssolutions.com.
About the Author:
James J. Talerico, Jr. is an award-winning author, speaker, and a nationally recognized small to mid-sized (SMB) business expert.
With more than thirty- (30) years of diversified business experience, Jim has a solid track record and an A+ BBB rating helping thousands of business owners across the US and in Canada tackle tough business problems to improve the performance of their organizations.
His client success stories have been highlighted in the Wall St. Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business. He was named “Texas Business Consulting CEO of the Year,” by CEO Today Magazine, identified as a “Top 10 Management Consulting Entrepreneur to Watch in 2023” by Entrepreneur Magazine, was listed among the “10 Most Visionary Companies to Watch in 2023” by Inc. Magazine, and has also been ranked among the “Top Small Business Consultants” followed on Twitter.
For more than half a decade, Jim was a regular guest on “The Price of Business,” a nationally syndicated radio program on Bloomberg Talk Radio and has also appeared as a subject matter expert on many FOX Radio interviews. He is a regular contributor to several blog sites and has frequently been quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, The Entrepreneur’s Review, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.
Jim received a Gold “Stevie Award” for “Thought Leader of the Year,” a Gold “Stevie Award” for “Media Hero of the Year During Covid” and a Bronze “Stevie Award” for “Best Entrepreneur” in the Category of “Business and Professional Services” at the American Business Awards ® in New York City. The competition received more than 3,700 nominations and is the premier accolade for business excellence in the US honoring organizations of all sizes and industries. Jim also received an “Outstanding Leadership Award” at the Money 2.0 Conference for his contributions to the financial services industry.
Jim is the author of “8 Steps to Becoming an ETHICS FOCUSED ORGANIZATION,”™ a small business certification program that utilizes a unique eight – (8) step approach for strengthening ethics in any organization. The certification program won the Better Business Bureau’s “Torch Award for Ethics” for the North – Central Texas Region, the International Better Business Bureau’s “ Torch Award for Ethics,” and a Gold “Stevie Award” for “Ethics in Sales” at the International Sales & Customer Service Stevie Awards ®. Participants who complete this certification program are eligible to receive eight – (8) continuing education units from the University of Texas’ Division of Enterprise Development.
Jim received his Certified Business Exit Consultant (CBEC) ® designation from The International Exit Planning Association (IEPA) to help entrepreneurs, small business owners, family businesses, and middle market companies maximize their business exit, and he received his certification in succession planning from the ASPE.
Jim is also a Certified Management Consultant (CMC) ® and an active member of the Institute of Management Consultants. The Certified Management Consultant ® mark is awarded by the Institute of Management Consultants USA (IMC USA) and represents evidence of the highest standards of consulting, a commitment to continuous development, and an adherence to the ethical canons of the profession. Less than 1% of all consultants in the world are Certified Management Consultants (CMC) ®
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