Idaho Business Law Selling Your Ownership Interest in a Business

By Lane V. Erickson, Idaho Business Attorney

You started a business either by yourself or with some partners. Even if you had no partners at the beginning you may have partners now as part of your business as it has progressed. You worked hard to grow your business and to make it successful. Now, for some reason, you’ve decided that you want to sell all or a part of your ownership interest in the business to another individual. Now you have to figure out what is it that you need to do. We are here to help you.

This is a process we have had numerous business clients ask us to help them with. We have the skill, knowledge, and experience necessary to help our clients resolve this problem. For more than 70 years, the premier team of Idaho business lawyers at the Racine law office have assisted clients in every aspect of owning and operating a business, including selling an ownership interest in a business. Our team includes partners Lane Erickson and TJ Budge and attorneys Nate Palmer and Dave Bagley. Each member on our team has helped numerous business clients through the process of selling all or a part of an ownership interest in a business. We are confident that we can help you too.

While this article is not designed to be exhausted on this topic, it is provided as a beginning place to help you know the steps that likely need to be accomplished in order for you to sell all or part of your ownership interest in your business to someone else. To do this, we will talk about the notice and possible right of first refusal that may exist. We will then briefly describe the transaction documents that should be included in this transfer. Finally, we will talk about the corporate documents that should be involved in this transfer of ownership.

If you made the decision to sell all or part of the ownership interest you have in a business, the first step that you need to do is to provide a written notice to the other owners of the business. This is an important step. It may also be a required step based in the corporate documents that may already exist.

Let’s say for example, that your business manufacturers car batteries and is named Auto Energy Plus, LLC. Because your company is an LLC, it should have an operating agreement that each of the owners of the business have signed. The operating agreement probably contains some restrictions on your ability to transfer your ownership interest to other people without first providing notice and a right of first refusal to either the other owners of the business or to the business itself. This simply means that the other owners have a right to purchase your ownership interest before you sell it to any outside, third parties. If the other owners don’t want to buy it then usually the corporation has the next opportunity to buy the ownership interest. If neither the owners nor the business exercise this right, then usually you can move forward with selling the ownership interest to an outside third-party.

If you try to sell your ownership interest to someone outside of the business before you provide notice and give an opportunity to those who hold the first right of refusal, this may invalidate your transaction. In other words, you may have to give back the money and the third party who receives your ownership interest may have to give it back to you so that it can be purchased by the other owners or the business.

The most important thing for you is to read through the operating agreement and make sure you understand what it says about your right to transfer your ownership interest to others. The operating agreement should spell out whether you can transfer your ownership interest to a third party and if so, what limitations are restrictions may apply. So, the starting place, is for you to provide a written notice to the other owners had to make sure you understand what the terms and conditions of the operating agreement are.

Assuming that you are okay to move forward with a transaction in selling your ownership interest to a third party the next step is to make sure the transaction documents for the sale are completed. This would include a purchase and sell agreement, and also an actual transfer of ownership through a bill of sale or through some other documentation that would evidence the ownership interest be transferred to the new person.

Oftentimes, the corporation itself may have documents or forms that are used when this type of a transaction occurs. If not, then we recommend that you work with a qualified Idaho business attorney who can help you prepare and finalize these documents to make sure they have been done correctly.

The final step that needs to be completed is that the corporation’s documents need to be updated or changed. This could include a corporate resolution allowing you to sell or transfer your ownership interest in the business to a third party. It should also include documents that would reflect an acceptance of the current operating agreement or bylaws and that agreement by the new owner to be bound by these documents.

Alternatively, this may require drafting a new operating agreement or new bylaws. This just depends on the intentions and goals of the remaining owners of the business. Additionally, there should be some actual record of the change in ownership and the percentages of ownership that exist after the transaction has been completed. Again, this could be accomplished through a corporate resolution, and amended operating agreement or bylaws, or through minutes of a meeting that reflect the new person’s ownership percentage or interests.

As was stated in the beginning, the purpose of this article is to give you a place to start. If you are considering selling all or part of the ownership interest you have in a business, we encourage you to speak with a qualified Idaho business attorney to help you with everything that should be done. We have helped numerous clients complete this process, and we are confident that we could help you too!

Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.