Key Takeaways

  • A sale of shares agreement in an LLC governs the transfer of ownership interests and outlines rights, responsibilities, and financial terms.
  • Having a well-structured buy-sell agreement helps prevent disputes and ensures smoother transitions.
  • Due diligence, valuation, and formal documentation are critical steps in the sale process.
  • State laws and LLC operating agreements significantly influence how ownership can be transferred.
  • Without an operating or buy-sell agreement, ownership transfers may require dissolution or court involvement.

An LLC purchase agreement is required to sell your business. You can find a purchase agreement template online and customize it to your needs.

What Is an LLC Purchase Agreement?

An LLC purchase agreement is a legally binding contract that allows an entity to transfer their ownership of an LLC or an LLC's membership interest(s) to another entity via a formal transaction.

Some Reasons for an LLC Purchase

Limited liability companies sometimes carry out a change in ownership.

Such ownership changes occur for a number of reasons, some of which are the following:

  • A member wants out of the company
  • A member wants a new member to join the company
  • A member becomes disabled, divorces, or dies
  • An owner decides to sell the whole business

LLC Membership and Partnership

An LLC is governed by members, and a member's ownership transfers when he or she sells the company membership interests via a bill of sale. What happens from then on depends on whether you own a single-member LLC or you own part of a multiple-member LLC. While you might have rights of refusal to the other members if you own part of a multiple-member LLC, you may have stricter rules governing sales in your operating agreement. For example, you may have to keep the business at a certain value.

An LLC, unlike stock in a corporation, can't be freely gifted or sold to another party because an LLC is based on partnerships, and under the law, you can't force anyone into a partnership with another party.

How Do I Transfer LLC Ownership?

Ownership in an LLC can be transferred only if the state allows full partner substitutions and all existing members agree on the transfer. In some states, the transfer is allowed, but the new member has no say in running the LLC and only has the right to his or her share of the profits or losses.

The procedure for transferring LLC membership depends on your state. It also depends on whether you're selling the whole business or simply changing the name and percentages of ownership. For example, you might change the percentage of ownership when you accept a new member or buy out a departing member (the owners of an LLC are referred to as “members”). Every member is entitled to a percentage of the business, which is called a “membership interest.” When there's a need to alter the percentage of ownership or admit new members, some of the LLC's membership interests will need to be transferred.

LLC Operating Agreement

The LLC operating agreement is crucial to determining how ownership is transferred in your LLC. You probably signed this when setting up your LLC; it's the contract among members stating how the LLC operates.

  • If it includes buy-out or sell-out provisions, you must abide by them.
  • If you have a different buy-sell agreement, which despite its name only governs internal transfers of membership interests, this determines the protocol for determining the value of the business.
  • Any agreement, in writing, by the members of the LLC controls what you are able to do with your share of the company. A common provision is a requirement that the member that's departing sells the membership interest to the other members at a fair price.
  • The provisions might also limit who can become a member, mandate that the LLC buys back membership interests from a departing member, or governs the transfer procedure.

When There's No Operating Agreement and Buy-Sell Agreement

If your LLC does not have an operating agreement or a buy-sell agreement, your state's laws determine how and if you can transfer membership interests. You might have the opportunity to negotiate a buy-sell agreement with your purchaser or secure a written agreement for ownership transfer. If your state or operating agreement doesn't allow ownership transfers, you may be required to dissolve the company.

Review of Operating Agreement

Since transferring ownership in an LLC has consequences for your business long-term, we highly recommend you consult with a lawyer and review your operating agreement to meet your LLC's growing needs.

Review your operating agreement with the following in mind:

  • Does it meet your needs?
  • Is it relevant to both you and the new member?
  • Does it have different provisions depending on if it's a single- or multiple-member LLC?

If the operating agreement is obsolete, prepare and sign a new one that reflects the new ownership or add an amendment to the operating agreement that names the new member(s). Depending on your state, you may not need to file an ownership transfer, but you may need to list any current member(s) in the annual report you provide to the state.

To sell your LLC, you must agree on a price with your buyer. You may want to hire a business valuation professional, or allow your buyer to check the books and records. The terms of sale will be documented in a memorandum of understanding or term sheet, possibly followed by a formal contract and sales agreement. File these documents with the state agency governing your LLC.

A Sales Agreement Draft

Make a sales agreement draft between you and the other party that the other members of the LLC authorized to take over your share of the company's interests. There's no particular format for an LLC's transfer of interest ownership. There are customizable templates on the internet, which you can find and use by doing a simple search. Alternatively, you can put a simple sales document together from scratch. Your sales document only has to include the following:

  • Interest percentage
  • Sales price
  • Date of transfer
  • Terms of transfer

After that, it should be signed and notarized in exchange for a payment.

Essential Clauses to Include in a Sale of Shares Agreement (LLC)

When drafting a sale of shares agreement for an LLC, it's essential to include clauses that clarify the parties’ intentions and mitigate future risks. Key provisions include:

  • Purchase Price and Payment Terms: Define the exact price and how/when it will be paid (lump sum, installments, etc.).
  • Representations and Warranties: Each party affirms certain facts—such as clear title, no pending lawsuits, or accurate financials.
  • Closing Conditions: List what must happen before the deal is completed (e.g., member consent, regulatory approvals).
  • Non-Compete and Confidentiality: Prevent the seller from using sensitive information to compete with the business post-sale.
  • Indemnification: Allocates risk if unknown liabilities emerge after the transfer.
  • Governing Law and Dispute Resolution: Specifies which state's law governs the agreement and how disputes will be resolved.

Buy-Sell Provision

It's in your best interest to include a buy-sell provision in your LLC's operating agreement inspired by a good foresight. A buy-sell provision in an operating agreement is essential to a smooth LLC ownership transfer. If you're looking to sell your whole business, or need a buy-sell agreement, you have to consult a lawyer.

If your LLC's operating agreement doesn't have a buy-sell provision, or if you can't come to an agreement concerning an interests transfer with other LLC members, check the limited liability company laws in your LLC's home state. State laws have default provisions that regulate the activities of LLCs that have no operating agreements.

Buy-Sell Agreement Types and Triggers

Buy-sell agreements in LLCs can take different forms, depending on how the members want to manage ownership changes. Common types include:

  • Cross-Purchase Agreement: Individual members agree to buy the interest of a departing member.
  • Entity-Purchase Agreement: The LLC itself buys back the departing member's interest.
  • Wait-and-See Agreement: A hybrid model where the LLC has the first option to buy, followed by members.

Trigger Events in a buy-sell agreement may include:

  • Death or incapacity of a member
  • Voluntary withdrawal or retirement
  • Bankruptcy or divorce
  • Involuntary transfer (e.g., court-ordered)

These triggers ensure that control of the LLC remains with the remaining members or the business entity itself.

State Laws

Based on the state law governing the transfer of interest ownership, you can proceed to notify the other members of your LLC, by writing, that you desire to sell your interests. Some states forbid the transfer of LLC interests. Instead, they demand that the LLC be dissolved and its members be paid their entitlements.

After the LLC is dissolved, the remaining members of the LLC, who wish to continue, can go ahead and form another LLC. Depending on the law of your LLC's home state, you can either provide a copy of the sales agreement between you and the other party or request for a buyout.

If you do not have an operating agreement or the members can't agree on provisions, you may have to petition your state's civil court to have a judge set a price for your membership interest.

Common Legal Pitfalls to Avoid in LLC Share Transfers

Mistakes during the sale of LLC interests can lead to invalid transfers, legal disputes, or unintended tax consequences. Key pitfalls include:

  • Failing to Obtain Consent: Ignoring operating agreement clauses requiring member approval can nullify the transfer.
  • Poor Valuation Methods: Arbitrary or outdated valuation practices can lead to disputes or lawsuits.
  • Incomplete or Inaccurate Agreements: Omitting terms or failing to define payment schedules can create loopholes.
  • Non-Compliance with State Law: Some states require formal filings or impose restrictions on non-member ownership.
  • Not Considering Tax Implications: Transferring membership interest may create taxable events for both buyer and seller.

Consulting with an attorney on UpCounsel can help you avoid these issues and ensure your transaction is legally sound.

What Do I Need to Know Before Buying an LLC?

Before you do a membership interests transfer, you ought to compose articles of amendment indicating the changes in LLC membership. Then, you should file the articles of amendment with your LLC's home state. A registered agent is required to boost the corporate image of your LLC. Several clients attest to the usefulness of the broad-scoped, online tools and solutions provided to help with the management of your LLC.

Do your research before purchasing a membership interest in an LLC. Do a credit check and consult with the Secretary of State. It's worth spending a couple thousand dollars in legal fees to know what you're getting into. Document everything. Templates for transfers of ownership can be found online.

Steps to Execute a Sale of Shares Agreement in an LLC

Selling an interest in an LLC involves more than a handshake—it requires specific legal steps to protect both the seller and buyer. Here’s a general process to follow:

  1. Review Governing Documents
    Before any action, review the LLC’s operating agreement and any existing buy-sell agreements. These documents may contain restrictions on transfers, approval requirements, and valuation methods.
  2. Get Member Consent
    Most LLCs require the consent of other members before a transfer of membership interest. Obtain written approval if needed.
  3. Conduct Due Diligence
    Buyers should investigate the LLC’s financials, liabilities, and contractual obligations. Sellers should be prepared to share tax returns, balance sheets, and key business contracts.
  4. Determine Fair Value
    Hire a professional appraiser or use a valuation formula in the operating or buy-sell agreement. Transparency here helps avoid disputes.
  5. Draft a Sale of Shares Agreement (LLC)
    This agreement should include:
    • Names of the parties
    • Description of the interest being sold
    • Purchase price and payment terms
    • Representations and warranties
    • Non-compete or confidentiality clauses, if applicable
  6. Sign and Notarize
    Once agreed upon, the agreement should be signed by both parties and notarized to add authenticity.
  7. Amend Internal Records
    Update the LLC's internal records to reflect the new ownership. This includes the member ledger and capitalization table.
  8. File with the State (if required)
    Depending on the jurisdiction, you may need to file an amendment with the Secretary of State or update your annual report.

Frequently Asked Questions

  1. Do I need a sale of shares agreement to transfer LLC ownership?
    Yes. A written agreement is essential to define the terms and ensure legal compliance with the LLC's governing documents and state law.
  2. Can I sell part of my ownership in an LLC without dissolving it?
    Yes, if allowed by the operating agreement and with the consent of other members, you can sell a portion of your interest without dissolving the LLC.
  3. How is the value of an LLC membership interest determined?
    Valuation can be based on a formula in the buy-sell agreement or determined by an independent business appraiser.
  4. What’s the difference between a buy-sell agreement and a sale of shares agreement?
    A buy-sell agreement is a pre-arranged contract among members outlining how ownership changes occur. A sale of shares agreement is the actual document used to complete a specific transaction.
  5. Are there tax consequences for selling my LLC interest?
    Yes, the seller may incur capital gains tax or other liabilities. It’s advisable to consult a tax professional before completing the sale.

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