LLC Change of Ownership Form: Everything You Need to Know
An LLC is a business entity governed by the state of operation, with the benefit of limiting owners' personal liability for business debts and judgments. 3 min read
2. Transferring Partial LLC Interest
3. Selling an LLC
4. Completing the Buyout Agreement
Updated November 4, 2020:
The LLC Change of Ownership Form is used to transfer ownership of a limited liability company (LLC) from one member to another. An LLC is a business entity governed by the state of operation, with the benefit of limiting owners' personal liability for business debts and judgments. Business liabilities must be paid by the business minus the member's initial ownership stake. An LLC can create provisions for ownership changes in either its articles of organization or operating agreement.
Reasons for LLC Ownership Transfer
An LLC may undergo changes in ownership when:
- An owner leaves the company.
- The existing owners invite a new member to join the LLC.
- A member dies, divorces, or becomes disabled.
- The members agree to sell the entire business.
The process for changing LLC ownership depends on whether only the member names and ownership percentages change or the whole business transfers to a new owner.
Transferring Partial LLC Interest
The percentage of the business owned by each LLC member is called a membership interest. When adding a new member or otherwise changing ownership percentages, these interests must be transferred. The process for doing so should be detailed in the operating agreement for your LLC. This document is a legal contract signed by LLC members that specifies operational details, which may include buyout or buy-sell provisions that govern ownership transfers. Some LLCs even have a separate agreement for buying and selling ownership stakes.
Buy-sell provisions usually include guidelines for valuing the membership interests and the LLC as a whole. They can also restrict potential members, require the LLC to purchase back shares from a member who is leaving, or specify the process for ownership transfer approval.
Buy-sell provisions are typically used when:
- A member or members retire or die unexpectedly.
- The LLC is sold outright.
- New members are brought in.
They may also take effect in legal situations such as a divorce settlement or a lawsuit judgment.
When an LLC does not have an operating agreement or the agreement does not detail buy-sell provisions, you are subject to state guidelines for the transfer of membership interests. This usually involves negotiating a written ownership transfer or a buy-sell agreement.
Some states require the company to be dissolved if the operating agreement has no ownership transfer provisions. In these cases, you should consult with a business attorney to avoid long-term ramifications. He or she can regularly review your operating agreement and make relevant updates as needed, such as when a new ownership structure is created. In some cases, you can list new members on an amendment to the original agreement. Most states don't require you to file this amendment. But a list of current members will be required for your annual report.
Selling an LLC
The LLC buy-sell agreement only governs membership transfers among existing and new members. However, it does not offer provisions on selling the entire business to an outside party. If you want to sell your LLC, you first need to agree on a fair price with a potential buyer, which may include consultation with a business valuation expert or an examination of your business books and records. Some buyers will want to purchase only the company's assets and not the entire LLC.
Because the process of selling an LLC can have complicated impacts on your taxes and financial and legal situation, you should consult a lawyer who is experienced with this process. The attorney will first prepare a memorandum of understanding with the complete terms of the sale, followed by a formal contract.
Completing the Buyout Agreement
The absence of a buy-sell provision or agreement, or the incorrect execution of an existing agreement, can create member liability. For example, if a member no longer receives profit sharing but is not officially removed from ownership, the LLC could be responsible for his or her debts in a later bankruptcy filing.
To avoid this situation, complete and execute a buyout agreement that clearly names the parties in question, their contact information, and the unit or value of their ownership stake. This agreement should also note whether the member is being bought out or relinquishing his or her stakes without monetary consideration, such as in a divorce.
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