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How To Move a Pre-Existing Business Into a Newly Formed Company

You listened to your business lawyer, and formed a limited liability company (called LLC) or corporation (such as a C-Corp or S-Corp), and you want to move your pre-existing business into the new company. This is actually a common question, and it’s really important that you do it right.

How you do this, depends on a number of factors with your pre-existing business, as well as your new company.

Questions to Ask Yourself

You need to ask yourself some questions, and what you need to do depends on the answer to those questions. Specifically, DOES YOUR PRE-EXISTING BUSINESS HAVE ANY . . .

  • . . . value? If so, then you should (1) consult with a CPA or Accountant, to verify you are taking tax issues into account, and (2) the new company should purchase the pre-existing business (more on this later).
  • . . . significant assets? Significant assets would include anything of value, real estate and/or titled (i.e. car, truck, trailer, boat, etc). If so, then you should (1) consult with a CPA or Accountant, to verify you are taking tax issues into account, (2) the new company should purchase the significant assets from the pre-existing business, and (3) the assets should be titled in the name of the new company.
  • . . . significant liabilities? Significant liabilities include debts, lines of credit, mortgages, credit card balances, etc. The new company should do everything possible to assume those liabilities — such as paying off, closing down accounts and reopening new ones, refinancing in the name of the company, etc. What YOU DO NOT WANT TO DO, is to continue to use a credit card, revolving line of credit, etc, that is in your personal name, in furtherance of the business.
  • . . . contracts? If so, then you will need to “assign” those contracts from yourself personally to the new company. Often, this will require permission from the other party you are contracted with (for example, leases or insurance contracts). You must read each contract carefully, and figure out whether (1) assignment is even permitted, and if so (2) whether you need permission to do an assignment. You must also notify everyone, as appropriate, so everyone knows they are working with a new company versus you individually.
  • . . . partners, or new partners with the new company? If so, then you need an appropriate partnership agreement for the NEW BUSINESS, that properly factors in the issues raised in the above questions.

Purchasing Your Pre-Existing Business

This is usually accomplished with a (1) Purchase Agreement, and (2) Bill of Sale. These are private documents, not registered with any state, but that would be required in instances of an audit or where ownership is contested somehow (i.e. the new company is in a lawsuit, and the plaintiff or opposing party is trying to bring you in personally).

The Purchase Agreement indicates exactly what is being sold, when, and what is excluded from the sale (i.e. certain assets, liabilities, and more). If you are the sole owner of the pre-existing business and the new company, the details are less critical, then if you have partners. Then, it’s absolutely critical to get all the details correct, so that it’s clear who is responsible for what, and how the partnership works.

Make sure you consult with a CPA or Accountant, because the tax implications of the sale of a business can be significant.

Note that a “sale” in such circumstances can consist of $1, or the fair-market value of the pre-existing business (again, consult with a CPA or Accountant to better understand the tax issues). If your new company doesn’t have the money to pay for your pre-existing business, your new company can certainly issue you a promissory note.

Purchasing Significant Assets

Significant assets can be acquired by your new company either with the Purchase Agreement (identified above), or with their own separate Bill of Sale (and title transfer, as appropriate).

Remember that assets that have liens, such as real estate with mortgages, will need permission of the lien holder to move assets — and lien holders are certainly not required to approve and in fact, may have very little incentive to do so. Sometimes, you may need to refinance to affect a transfer from you personally to your new company.

Dealing with Significant Liabilities

As mentioned above, liabilities need to be transferred to the new company. This may be difficult, depending on the liability. Mortgage holders, finance companies, banks, landlords, etc, will probably not be willing to permit you to move a significant liability from you personally to a new company. Instead, you may need to payoff balances or refinance, as well as close accounts and reopen under the ownership of the new company.

This is a critical step that is often overlooked, especially if your credit situation has changed significantly over time. If you don’t do this, you run the risk of assuming liabilities personally over time as well as being accused of “co-mingling” if your new company should ever be sued in the future. Such co-mingling can give a plaintiff’s attorney or opposing party an opening to “pierce the corporate veil.” Learn more with our blog article, What is “Piercing the Corporate Veil” ?.

Dealing with Partners

It is very important that you nail-down a “partnership agreement” with any partners. This is for everyone’s protection. You first want to be given credit for your contributions from the pre-existing business to the new company, as well as provide for the opportunity to “reclaim your assets” if the new company should dissolve someday or your partner(s) leave the company (assuming you want to keep such assets for yourself).

A “partnership agreement” can consist of an Operating Agreement for a LLC, or it’s own stand-alone document for anything else, such as a Corporation.

Just remember that if you do not have a good partnership agreement reflecting your understanding, any and all business, assets, etc, that you put into the new company will be considered “capital contributions” at best, switching ownership to the new company — where your partner would then own his or her corresponding share associated with their ownership interest.

In Summary

A good rule-of-thumb is that if you’ve answered “YES” to any of the Questions to Ask Yourself above, you should really consult with both a CPA / Accountant, as well as an experienced business attorney. This is especially true if any partners are involved.

Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.

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