LLC Purchase Agreement: Everything You Need to Know
You need an LLC purchase agreement to sell your business. You can find a purchase agreement template online and customize it to your needs.6 min read
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.
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.
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.
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.
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