Key Takeaways

  • An LLC transfer of ownership form is essential for documenting changes in ownership and must align with the LLC's operating agreement.
  • There are two common types of ownership transfers: full business sale and partial interest transfers.
  • Transfer methods depend on state laws and whether the LLC has provisions like buy-sell agreements.
  • Steps include valuation, approval, documentation, and updating state filings or IRS information when needed.
  • Improperly handled transfers can lead to liability risks or dissolution in some states.

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.

Types of LLC Ownership Transfers

LLC ownership transfers typically fall into one of two categories:

  1. Full Transfer (Selling the LLC) – When all members agree to sell the entire business to a new party. This requires dissolving the current LLC or assigning membership to the buyer, depending on the operating agreement.
  2. Partial Transfer (Transferring Membership Interest) – When one or more members transfer part or all of their ownership stake to existing or new members. This is more common in multi-member LLCs and usually addressed in a buy-sell agreement.

Each type may involve different procedures, state filing requirements, and tax implications. Having a clearly written LLC transfer of ownership form ensures a smooth and legally compliant process​​.

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.

Using an LLC Transfer of Ownership Form

An LLC transfer of ownership form formalizes the change in ownership. This form should:

  • Identify the transferor and transferee
  • State the percentage or units of membership being transferred
  • Specify whether the transfer is for monetary value, inheritance, or another cause
  • Be signed by both parties and notarized, if required

Some states may require filing the updated ownership information with the Secretary of State. While this is not always mandatory, it's best practice to keep all state and federal filings up to date. Additionally, IRS Form 8832 or Form 1065 may need to be amended if the ownership structure affects tax treatment​​.

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. 

Valuation and Due Diligence for a Full Sale

Before selling an LLC, the business must undergo a valuation process. This typically includes:

  • Reviewing financial statements and tax returns
  • Assessing assets and liabilities
  • Evaluating cash flow and market conditions
  • Hiring a professional appraiser or CPA, especially for complex businesses

Due diligence also involves reviewing contracts, intellectual property, employee obligations, and any pending litigation. Buyers often request these documents during negotiations. Ensuring transparency at this stage can prevent legal issues down the road​​.

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. 

Filing and Notifying the State and IRS

After completing the ownership transfer, the following steps may be necessary:

  • Update the Operating Agreement: Reflect new ownership percentages and roles.
  • Amend Articles of Organization (if required by your state): Some states require updated member information to be filed.
  • Submit IRS Forms: Depending on how your LLC is taxed, the IRS may need notice of the change. This includes:
    • Form 8832 if the LLC changes classification (e.g., from multi-member to single-member)
    • Form 1065 for partnerships (to report changes in ownership)
  • Update Business Licenses and Bank Accounts: New members or ownership percentages may require revisions to permits and financial authorizations.

These filings help avoid confusion about liability, tax obligations, and authority to act on behalf of the LLC​

Frequently Asked Questions

  1. What is an LLC transfer of ownership form used for?
    It's a legal document used to formally transfer part or all of a member's interest in an LLC to another party.
  2. Do I need to file the transfer form with the state?
    Not always, but some states require updates to the Articles of Organization or member listings. Always check your state’s specific requirements.
  3. Can you transfer LLC ownership without an operating agreement?
    Yes, but state default laws will apply, and the process may be more complicated. A written agreement is strongly recommended.
  4. Does an ownership transfer affect how the LLC is taxed?
    It can. A transfer that changes the number of members or alters the control structure might affect the LLC's tax classification with the IRS.
  5. How do I determine the value of a membership interest?
    Valuation can be set in the operating agreement or determined through an independent appraisal, often using financial records and market comparisons.

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