Key Takeaways

  • Yes, you can change the owner of an LLC by following the procedures outlined in the operating agreement or state law.
  • Ownership changes often involve an ownership interest transfer, amendment to the operating agreement, and state filing updates.
  • Ownership can change via sale, gift, inheritance, or buyout.
  • Consent from other members and valuation of ownership interest are usually required.
  • Tax implications may arise, including those from IRS default classification changes or EIN reassignment.

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

Why the Operating Agreement Is Critical for Ownership Changes

The operating agreement is the cornerstone for navigating ownership transfers in an LLC. It usually outlines the process for:

  • Selling or transferring membership interest
  • Requiring member approval before a transfer
  • Establishing a buy-sell agreement framework
  • Specifying what happens upon a member’s death, incapacity, or withdrawal

If your LLC does not have an operating agreement, state default rules will govern the process—which may not align with the members' preferences.

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.

Common Methods for Transferring LLC Ownership

LLC ownership can change in several ways, depending on the business structure and terms set forth in the operating agreement:

  1. Selling Ownership Interest – A member may sell all or part of their interest to another member or an outside party, subject to any right of first refusal clauses.
  2. Gift Transfers – In some cases, owners may gift their ownership interest to family members or others.
  3. Inheritance – When a member dies, their interest may transfer to a beneficiary through a will or trust, or according to state intestacy laws.
  4. Buyouts – A voluntary or mandatory buyout may be triggered by events like retirement, expulsion, or death, using pre-agreed terms.
  5. Mergers or Sales – Ownership can also change when the entire LLC is sold or merged with another business.

Each transfer method should comply with the LLC’s governing documents and may require amending the operating agreement or Articles of Organization.

Steps to Finalize an LLC Ownership Change

Once the method of transfer is agreed upon, these are the general steps to complete the change:

  1. Review the Operating Agreement – Confirm the procedure for ownership transfer, including required consents or approvals.
  2. Obtain Consent from Members – Most LLCs require majority or unanimous approval before a membership interest is transferred.
  3. Draft a Purchase and Sale Agreement or Assignment of Interest – This formalizes the transfer terms.
  4. Amend the Operating Agreement – Update the agreement to reflect the new ownership structure.
  5. Update State Filings – Some states require amending Articles of Organization or filing a Change of Members form.
  6. Notify the IRS – If there’s a change in tax classification or responsible party, you may need to obtain a new EIN or update your EIN information.
  7. Adjust Bank Accounts and Licenses – Update business bank account signatories, permits, and licenses as needed.

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.

Tax Considerations When Changing LLC Ownership

Changing LLC ownership can have significant tax implications, especially if the transfer alters the LLC’s tax classification. Consider:

  • Single-member to multi-member LLCs may be reclassified from disregarded entities to partnerships for tax purposes.
  • Multi-member to single-member LLCs may result in a dissolution of the partnership for tax purposes.
  • Gifted interests may have gift tax implications depending on value and relationship.
  • Capital gains taxes may apply if ownership is sold for more than its basis.

It’s crucial to consult a tax professional to evaluate the potential consequences of any ownership transfer.

Frequently Asked Questions

  1. Can you change the owner of an LLC without an operating agreement?
    Yes, but the process will be governed by your state’s default laws, which may require member consent and formal documentation.
  2. What happens if an LLC member dies?
    The deceased member’s ownership typically transfers to heirs or beneficiaries, depending on the will, trust, or state intestate succession laws.
  3. Do you need to notify the state when changing LLC ownership?
    In many states, yes. You may need to file an amendment to the Articles of Organization or a Change of Members form.
  4. Can a member transfer their interest to anyone?
    Only if the operating agreement allows it. Most agreements require consent from other members for transfers to third parties.
  5. Is a new EIN required when changing ownership?
    Sometimes. If the ownership change alters the LLC’s federal tax classification, you may need to apply for a new EIN with the IRS.

It is important to consider all of these factors when deciding whether to change the ownership of your LLC. If you need help on can you change the owner of 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.