1. What is an Operating Agreement?
2. How to Change Ownership of a Limited Liability Company
3. Management and Ownership FAQs

An LLC, or limited liability company, is a form of business that's owned by its members who are protected from the liabilities and debts of the business. They might also control the LLC or have passive positions in the business. The LLC is a mix of the best features of corporations and partnerships. This is a popular way to structure a business under state law. 

Those who own a limited liability company will have the same protection that a corporation would. They also benefit from the tax structure and get to manage the partnership. The rules regarding the operation, formation, change of ownership, and dissolution of a limited liability company will vary from state to state. Many states will allow the LLC's owners the flexibility to come up with which methods and conditions under which the ownership can be changed.

What is an Operating Agreement?

When a limited liability company is formed, an operating agreement is prepared. This includes the rules regarding management, ownership, and finances for the limited liability company. The members will set the terms of the operating agreement pertaining to any future changes when it comes to company ownership.

Most states don't force a limited liability company to have an operating agreement. However, it is a good idea as it can get rid of any conflicts by making it clear how the business runs. The following topics are covered in the agreement:

  • profit and loss allocation
  • the percentage of ownership 
  • changes in ownership 
  • management duties and responsibilities
  • other issues

How to Change Ownership of a Limited Liability Company

An LLC can change ownership when members are added or removed. Members can usually give up their interests or may be involuntarily removed under specific circumstances. The rules vary from state to state when it comes to changing an LLC's ownership.

The members of a limited liability company can look at the operating agreement to see if a procedure for transferring or selling a member's part in the company is listed. The company should check the regulations and laws related to ownership changes to see if there are certain filing requirements or rules. Some states, including New Jersey, need a form completed and signed with the attorney general's office before a member can be added or removed. 

The most frequent way of changing ownership is by selling to other members. The operating agreement dictates how ownership in the LLC can be changed. Normally a buy-sell agreement is required and should also be included in the operating agreement. This agreement will list the method for determining the value of the member's interest so it can be sold to another member at a fair price.

If the ownership isn't changed according to the operating agreement, there can be unnecessary costs and litigation. It is possible to sell to a third party as long as the written agreement doesn't prohibit or restrict it. In some cases, the other members of the LLC will need to consent to a sale to a third party.

One way to receive ownership of an LLC is by inheriting it from a deceased member's heirs. Another option is having it transferred to the deceased member's beneficiary. If the member does not have a trust or will when they die, the law will divide up the member's ownership interest through the intestate succession laws of their state.

Management and Ownership FAQs

According to the Texas Business Organizations Code, the professional corporations and for-profit corporations need to have at least one president, director, and secretary. One person can hold all three of these positions. If the LLC is a nonprofit corporation, the code requires it to have a minimum of three directors, one secretary, and one president. In a nonprofit corporation, separate people must hold each of these positions.

Any liabilities that occur due to tax forfeiture are discussed in the Texas Tax Code, which also covers the interpretation of such statutes. Management information is collected for LLCs and corporations by the Texas Comptroller of Public Accounts.

It is important to consider all of these factors when deciding whether to change the ownership of your LLC. If you need help with changing ownership of your business, 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.