Key Takeaways

  • Buying into an LLC can involve either purchasing an existing interest or contributing capital for a new membership stake.
  • Approval from existing members is usually required and may be subject to terms in the operating agreement.
  • Due diligence should assess financials, legal standing, tax status, and the LLC’s internal governance.
  • The buy-in process includes negotiating price, formalizing rights and duties, and amending the operating agreement post-sale.
  • Tax implications depend on the LLC’s classification and may trigger additional filings or elections.
  • Post-closing steps can include notifying the IRS, updating membership records, and completing required state filings.

If you're thinking of buying into an LLC, you'll need to buy membership interest. An LLC offers its members/owners the legal protections of a corporation but the management of a partnership. State laws give members the right to govern the business by agreement among themselves.

Buying an LLC: Introduction

There are things to consider when buying into an LLC. If you are buying someone's LLC membership there are tax benefits. There's less risk when buying an existing company which can give you more immediate returns than a start-up. There's a tax reform where LLCs receive beneficial tax treatment.

You can take the option of making a Section 754 election with future members. This election allows you to claim additional tax on assets within the LLC to deduct depreciation and/or amortization of income taxes. An LLC commonly has depreciated assets in the business so that the tax basis of the company's assets is less than the LLC's value.

Steps to Buying an LLC

  • Identify an LLC to Buy
  • Consent
  • Operating Agreement
  • Framework of the Deal
  • Buy-In Terms
  • Due Diligence
  • Written Agreement
  • Capital Account
  • Closing

Identify an LLC to Buy

Consider how you will finance your purchase, who will operate the LLC after buying it, how this affects your personal finances, and what is the long-term chance of the company's success.

Once you have figured out which LLC is best, you have to contact the owners(s) to know if they're interested in selling. If they're positive then you can think about the details.

Consent

Get the okay from the LLC members to continue. The existing members hold all of the ownership interest and if they bring in a new owner then they would have to decrease their ownership percentages.

No member can be forced to reduce his/her ownership interest. Without a written agreement stating otherwise, state law usually requires unanimous consent from everyone to allow a new member.

Operating Agreement

If there's an operating agreement available which goes over the possibility of a new member it has contract force and takes precedence over state law.

You have to figure out what kind of rights you'll have as a member. Do you only receive profits with no say? The operating agreement specifies these rights.

Framework of the Deal

Do you want to buy the whole LLC or just a piece of equity? Parties will agree to the keys of the deal and write them down. The document to do this is named memorandum of understanding or term sheet which will be used for the purchase document.

Financing the Purchase

When evaluating how to buy into an LLC, prospective members must consider how to finance their buy-in. Options include:

  • Personal Savings: Direct payment from personal assets.
  • Business Loans: Financing from banks, SBA loans, or private lenders.
  • Seller Financing: The existing member may allow installment payments over time.
  • Outside Investors: Third parties may provide capital in exchange for future equity or a share of returns.

Buyers should align their financing strategy with the LLC’s financial expectations, any capital contribution requirements, and their personal risk tolerance.

Buy-In Terms

If the members will allow a new member then they have to determine a buy-in price. Members can determine the value to be what they think a certain portion of the company is worth since there are no restrictions.

The members value of the LLC is determined by many things such as growth potential and current health, and it can be difficult to determine.

Due Diligence

Due diligence is where the buyer, attorneys, and accountants review the LLCs overall finances before ending a sale. The buyer's attorney will create a due diligence checklist where the seller has to provide information to the buyer to review such as employee contract and financial statements. If there's any intellectual property this should be provided too. The attorney reviews the documents while the accountant reviews the LLC's taxes and bank accounts.

Written Agreement

The transaction details have to be written as the agreement. The buy-in price and rights of the new owner have to be specified. Once the agreement is signed and the money exchanged, the agreement has to be updated to reflect the new member's participation.

The sale is legalized and the terms are set in the agreement. Once the purchase agreement is final, the buyer's attorney prepares a final checklist to give to the seller's attorney. The checklist will list the documents that have to be done before signing the deal.

Negotiating Member Rights and Obligations

Before joining the LLC, prospective buyers must negotiate their:

  • Voting Rights: Whether the new member has equal, limited, or no say in decision-making.
  • Profit and Loss Sharing: The proportion of income or losses assigned to the new member.
  • Management Role: Whether the member is passive or actively involved in operations.
  • Fiduciary Duties: Any duties owed to the LLC and other members, particularly in manager-managed structures.

These terms should be expressly stated in the operating agreement or membership purchase agreement. Without clarity, disputes may arise later.

Capital Account

Ask the LLC to open a capital account which is used to keep track of member contributions. These accounts will help members divide profits in case the company closes.

Closing

Typically the closing is the end of the transaction unless there are post closing matters. Be careful and seek professional help to make sure buying a business turns out for the best.

Compliance and Reporting Requirements

After buying into the LLC, new members and the company may have obligations including:

  • IRS Notification: If the LLC adds a second member, it must inform the IRS and may need a new EIN.
  • State Amendments: Some states require updating formation documents or listing new members in annual reports.
  • Licensing and Permits: New ownership may trigger the need to update business licenses or operating permits.
  • Buy-Sell Agreements: Consider updating or creating buy-sell provisions to define exit terms for all members.

Failing to comply with these requirements can result in penalties or legal complications down the road.

Frequently Asked Questions

1. Can I buy into an LLC if I’m not a U.S. citizen?

It depends. Some LLCs—especially those taxed as S corporations—may restrict foreign ownership. Check the operating agreement and tax structure.

2. What’s the difference between buying an LLC and buying into an LLC?

Buying an LLC typically means purchasing the entire business, while buying into an LLC means acquiring a partial ownership interest as a new or additional member.

3. How long does it take to buy into an LLC?

The timeline varies but can range from a few weeks to several months, depending on the complexity of negotiations, due diligence, and required approvals.

4. Do I automatically get management rights when I buy into an LLC?

Not necessarily. Management rights must be negotiated and confirmed in the operating agreement—some members may be passive investors only.

5. Are there risks to buying into an LLC?

Yes. Risks include undisclosed debts, limited control, or tax liabilities. Performing thorough due diligence and securing legal counsel helps mitigate these risks.

If you need help with buying into an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.