Are state or federal filings required for “simple” changes in business ownership?

I am often asked whether state or federal filings are required to effectuate a “simple” transfer of ownership in a privately held corporation or limited liability company (LLC) to a family member or affiliated corporate entity. The question often raises more issues than one may think. Consider the following…

Generally speaking…
While state filings are required in sophisticated corporate dispositions such as mergers and consolidations, no state or federal “corporate law” filing is required to effectuate a change in entity ownership when the transfer occurs by way of a “simple” transfer of corporate stock or LLC membership interest. And, assuming the parties are going to proceed without undertaking due diligence or requiring common contractual components of arms-length corporate dispositions (e.g., warranties and representations, escrows, earn-outs, etc.), the transfer can be effectuated by way of a basic assignment agreement.

But, consider this…
Even the “simplest” change in entity ownership may raise a variety of issues. The following is a non-exclusive, non-inclusive list of things to consider:

  • Tax. Changes in entity ownership may require changes in tax reporting practices and may have tax consequences to both the transferor and transferee. Thus, competent tax advice should be sought when contemplating a transfer of ownership.
  • State Registration. A change of ownership may trigger a requirement to update the entity’s state business registration for tax and employment purposes.
  • Registered Agent. If the transferor is the entity’s registered agent, the parties may wish to change the entity’s registered agent and office address so the transferor is no longer burdened with responding to notices and court documents, and so the entity is assured that it will receive same.
  • Negative Covenants. Even if the parties are not undertaking traditional due diligence, it is important to determine whether the transfer requires the consent of a third party. For example, significant agreements (e.g., franchise agreements, commercial leases, credit facilities and loan agreements, government contracts, etc.) often contain provisions that prohibit a “change of control” without advance consent.
  • Governance Documents. Operating agreements, shareholder agreements and other corporate governance documents often place restrictions on the transfer of membership interests/stock. Thus, such agreements and documents should be reviewed to ensure the transfer is permitted and complies with the procedures (if any) respecting a transfer.
  • Personal Guarantees. Very often, major creditors (e.g., lenders, franchisors, commercial landlords, etc.) require the owner(s) of an entity to personally guarantee the respective obligations of the entity. Generally, a transfer of the guarantor’s interest in the entity does not terminate the transferor’s obligation under the guarantee.
  • Certificates; Ledgers/Registers. If the entity issues stock/membership certificates, the transferor’s certificates should be surrendered and new/updated certificates should be issued. Also, the entity’s stock/LLC interest ledgers and registers should be updated to reflect the transfer.
  • Resignations. The surrender of ownership does not “automatically” terminate the transferor’s employment or status as a director, officer or manager of the entity. Where appropriate, the parties may wish to document applicable resignations.
  • Bulk Sale Notification. Where all or substantially all of the assets of a business entity are transferred, a notification to the state’s taxing authority may be required. The failure to comply with a bulk sale notification may subject the transferee to liability for the transferor’s state tax obligations. Generally, stock and membership interests owned by an individual is not a business asset, and no bulk sale notice is required. However, the bulk sale notification requirements apply where the stock or membership interest is owned by a business.
  • Environmental Reporting and Remediation. Where the underlying company is an industrial establishment, a change in the controlling interest of the company may trigger reporting requirements under environmental law. Furthermore, the change may trigger a requirement to assess and/or remediate the condition of the company property. Thus, advice of an environmental attorney and/or consultant may be necessary.
  • Securities Law & Regulation. A transfer of ownership in a privately held corporation or LLC will very often be exempt from registration requirements under state and federal securities law and regulation. Nevertheless, the parties may wish to give at least some attention to the issue.
  • Insurance. A transfer of entity ownership should be reviewed by a qualified insurance professional to determine whether any policy changes or endorsements are necessary.
  • Marketing Materials. Marketing materials (e.g., websites, brochures, business cards, etc.) should be reviewed and revised as necessary to reflect a change in the entity’s key personnel.
  • Professional Practices. The transfer of ownership in a professional/para-professional service entity may implicate any number of additional regulatory and professional liability insurance issues.

While no state or federal “corporate law” filing is required to effectuate a “simple” change in entity ownership, even the “simplest” change in entity ownership may raise a variety of issues worthy of consideration. Please feel free to contact me if you would like more information about transferring corporate stock or LLC membership interests.