How to Change LLC Ownership: Everything You Need to Know
How to change LLC ownership is established by state laws and by the limited liability company's operating agreement.3 min read
How to change LLC ownership is established by state laws and by the limited liability company's operating agreement. A limited liability company (LLC) is a business entity that provides its owners, called members, with limited personal liability for business debts and obligations. This means their personal assets cannot be seized beyond their initial investment in the LLC.
Many business owners opt to form an LLC because this structure combines the advantages of a corporation with those of a partnership. Not only do the owners receive liability protection, but they are also taxed as a pass-through entity. This means profits are not taxed at the corporate level, but they are reported on the individual tax returns of each member. The laws governing LLC administration vary by state.
Transferring LLC Ownership
Ownership changes may occur in an LLC for various reasons, such as:
- A member's departure
- Members' desire to bring in a new member
- A member dies or becomes disabled
- The members decide to sell the entire LLC.
The transfer process will vary, depending if you are adding or deleting members and changing ownership percentages or transferring the entire business.
Transfer of Partial LLC Interest
Each LLC member owns a percentage of the business. If a new member is brought in or if a member leaves, these percentages must be adjusted. The procedure for transferring ownership interest should be spelled out in the operating agreement for your LLC. This contract details the administration of the business, including buy-sell provisions. Some LLCs have a separate buy-sell agreement.
Buy-sell provisions indicate the method used to value shares of the LLC and may:
- Restrict who may become a member.
- Require the LLC to purchase shares.
- Specify the method through which a transfer must be approved.
If your operating agreement does not exist, or it does not include buy-sell provisions, you should default to state laws about LLC membership transfers. You can also negotiate a buy-sell agreement among all the members at the time of transfer.
Some states require the dissolution of the company when a member leaves, if the operating agreement does not include buy-sell provisions. If you're not sure how transferring membership shares will affect your LLC, you may want to consult an attorney.
A membership transfer provides a good opportunity to review your operating agreement and to make updates if needed. You'll also need to make an amendment detailing changes in membership. The state does not usually require a copy of this agreement, but it will receive updates with your regular annual report.
Selling an LLC
Selling the entire business to a third party is not governed by a buy-sell agreement. Instead, you need to agree on a price with a potential buyer, which often involves consulting a business valuation expert and/or analysis of your books and records by the buyer. Some buyers will want to purchase the entire company, while others will want to purchase only the LLC's assets.
It's important to consult an attorney with experience in the tax, legal, and financial ramifications of selling or buying an LLC. He or she can create a memorandum of understanding or a term sheet, which is typically followed by a formal contract.
Completing the Buyout Agreement
Buyout agreements share several common elements, including:
- The full legal names and contact information of the parties involved.
- The number of membership shares in question.
- The value of each share.
The agreement should state whether the member is being bought out or is relinquishing his or her shares, such as in a divorce settlement. Sometimes the LLC itself or another member purchases a member's shares. In other cases, an insurance policy is put in place to buy the interests of a key member in the event of his or her death.
When the buyout agreement has been executed, the certificate of organization must be updated to show the changes in ownership. The member who has sold his or her shares must relinquish membership certificates. New certificates will be issued to the new member if the valuation has changed. If a new member has not been added, shares can be distributed among remaining members or held by the LLC.
If you need help with changing the ownership structure 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.