Changing Ownership of an LLC: Everything You Need to Know
LLCs, or limited liability companies, are special business formations at the state level, granting some of the attributes of both a partnership and a corporation.3 min read
LLCs, or limited liability companies, are special business formations at the state level, granting some of the attributes of both a partnership and a corporation. While an LLC has many advantages, it is not perfect and sometimes a change in direction is needed through a change in leadership. In that case, you'll need to change the leadership of your LLC.
What Is an LLC?
LLCs are a kind of company formation that alters the ways certain laws interact with the company. There are two major categories of this difference. The first is that an LLC limits the liability of its partners to the amount they have invested personally into the company. This is advantageous because most partnership arrangements count business liability for any problems as entirely sitting on the partners who control it.
On the other hand, an LLC can count its profits as personal income for its owners, who then include it on their yearly taxes as other income. A corporation's income, by contrast, is taxed twice — first when the company makes the money and files its yearly taxes and again when the invested party receives their portion of the earnings. So generally an LLC is taxed less than a corporation.
One thing about LLCs is that the rules governing them are state laws, not federal for the most part. As a result, LLC law is a patchwork that changes depending on what state the company is operating in. This can cause a lot of complication when a company does business in multiple states at the same time, requiring a confusing morass of different filings. The RULLCA, also known as the Revised Uniform Limited Liability Company Act, seeks to unify these disparate requirements into a single set of LLC rules applicable across state borders.
Regardless of what state they are operating in, an LLC generally has one of two management arrangements.
- Member-managed LLCs
- Manager-managed LLCs
A member-managed LLC assigns management responsibility and authority across all members of the LLC, making all partners equally able to steer the company. The manager-managed LLC instead assigns specific officer positions to individuals, cutting off office political arguments at the possible risk of cutting members out of some decisions. It is worth noting that LLC laws almost always assign equal shares of profit distribution across all members regardless of percentage of ownership.
Why Change Things?
There are several reasons to change the leadership structure of an LLC. The unfortunate passing of a member is one and the decision to add a member is another. Perhaps the partners want to sell the company and adjust the structure to make that easier to do. Or possibly there are disagreements as to how the company is run, which can lead to tensions to the point where major changes are the only answer.
The first step in any change to the management structure or ownership allocation should almost always be consulting with an attorney with expertise in the appropriate area. Business law is complex, and having the right legal advice can mean the difference between success and failure.
Typically, changing the ownership arrangement of the LLC takes the preparation of a buy-sell agreement. The specifics will have been laid out at the LLC formation, so looking in the company's founding documentation will tell you what you need to know.
State location is also crucial to what kinds of actions need taking in order to make changes, so studying local law will help. At the same time, local law requirements can be adjusted in the formational filing, so exactly how much leeway you will have later on is a product of how much room you build in at the start. Since state laws often require majority or unanimous votes to change leadership in an LLC, this kind of planning can make a huge difference in leadership changes.
In any case, being forthright will serve the owners well. Addressing problems in advance and making sure the company is valued fairly and everyone involved is appropriately compensated for their efforts can keep last minute battles for position from affecting the company.
If you need help with changing the leadership of your 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.