Key Takeaways

  • LLC ownership transfers can involve partial or full transfers depending on the member’s intent.
  • Operating agreements and buy-sell agreements are critical in guiding the ownership transfer process.
  • State-specific regulations may dictate how an LLC transfer must be handled, sometimes requiring dissolution.
  • Legal and tax implications need to be considered, including possible changes to tax classification and capital gains liabilities.
  • Full ownership transfers involve additional administrative steps, such as amending the Articles of Organization.
  • Written agreements and legal documentation ensure a smooth transition and prevent disputes.
  • Consulting a legal professional is recommended to navigate complex ownership transfers.

An LLC transfer of ownership will change the percentage of ownership interest or allow you to add new members. Though typically straightforward, in some instances, changing the percentage of ownership within your limited liability company is more complicated and may even require legal counsel.  

Changing the Ownership of a Limited Liability Company 

Typically outlined in the LLC's operating agreement, changing ownership will require a buy-sell agreement. This is a fairly common step during the lifetime of limited liability companies. In fact, ownership may change for a number of reasons, including:

  • A member no longer wants to be a part of the company
  • Existing members would like to bring on a new member
  • A member becomes disabled, divorced, or unexpectedly passes away
  • The owner(s) wish to sell the entire company

Regardless of why you would like to change ownership, you must make these official changes in all of the organization's certificates. If not, liabilities of a leaving member could lead to serious consequences in the future. 

The actual process to change ownership will depend on a number of factors. For example, do you wish to sell the whole company or change the percentage of member ownership? To begin, review your operating agreement. 

Legal and Tax Implications of an LLC Ownership Transfer

Transferring ownership of an LLC carries significant legal and tax consequences, which should be considered before proceeding. These include:

Legal Considerations:

  • The LLC must amend its operating agreement to reflect new ownership.
  • Some state laws require unanimous member consent before transferring ownership.
  • If no operating agreement exists, state laws dictate the transfer process, which may require dissolution of the LLC.
  • Ownership transfers may trigger compliance obligations, such as filing an Amended Statement of Information with the Secretary of State.

Tax Considerations:

  • The IRS may classify ownership transfers as taxable events, leading to capital gains tax liabilities.
  • If an LLC is classified as a partnership, transferring ownership may change its tax classification.
  • Single-member LLCs converting to multi-member LLCs (or vice versa) may require new EIN registration.
  • State and local transfer taxes may apply depending on jurisdiction​.

How to Transfer Ownership in an LLC

Depending on how you originally organized the company, an LLC transfer of ownership can be rather easy or it can be challenging. Here are some factors that you should be aware of.

  • Since LLC's are state entities, rules need to be followed on a state-to-state basis.
  • To complete a transfer, understand all of the state statutes. For example, you may require unanimous consent from all members.
  • You should create an operating agreement that either makes it easy or more challenging to accept new owners, transfer percentages, etc. You should also consider certain restrictions that make sense for your business. 

Know that your operating agreement can be altered at a later date based on the evolving wishes of the members. If you are transferring ownership, go to the secretary of state's website to download a "Statement of Information" — which is required when the LLC's owners are near the end of that year's filing period. If owners are mid-year, download the "Amended Statement" document to update all relevant information. Once you have completed the appropriate form, all new and old members will need to sign. The form will then be submitted to the secretary of state along with all applicable fees. 

State-Specific Rules for LLC Transfers

Each state has its own regulations and requirements regarding LLC ownership transfers. While some states allow easy transfers through operating agreements, others require more stringent processes:

  • California: LLCs must file an amendment to the Articles of Organization with the Secretary of State. If no buy-sell agreement exists, state law dictates transfer procedures​.
  • New York: A Certificate of Amendment may be needed to reflect ownership changes in state records.
  • Texas: Some LLCs require public notice of ownership changes before the transfer is complete.
  • Delaware: Known for business-friendly laws, Delaware allows easier ownership transfers if specified in the LLC’s operating agreement​.

Business owners should consult their state's specific laws or a legal professional to ensure compliance.

Transferring a Partial Interest in the LLC

In an LLC, owners are referred to as "members" and each member will own a percentage of the business. This is also known as membership interest. Whether the owner would like to alter percentages or add new members, there will need to be a transfer of membership interests. All buy-sell provisions should have been outlined in your operating agreement at the time of formation. 

In some cases, LLCs will have a separate buy-sell document that outlines this agreement. Within this agreement, a method will generally be listed along with possible restrictions. This document will outline what needs to be accomplished to approve a transfer. If your LLC does not have an operating agreement or it does not include a buy-sell agreement, you should refer to the state statutes. 

Importance of Written Agreements and Legal Documentation

Documenting LLC ownership transfers through written agreements prevents disputes and ensures compliance with laws. Essential documents include:

  1. Buy-Sell Agreement: Defines terms for ownership transfers, including pricing and approval conditions.
  2. Amended Operating Agreement: Updates ownership percentages and voting rights.
  3. Purchase Agreement: Outlines sale terms between the seller and the new owner.
  4. Legal Filings: Some states require ownership transfers to be reported in public records.
  5. Member Consent Forms: If unanimous approval is needed, formal written consent should be obtained​.

Failure to maintain proper documentation can invalidate ownership changes, leading to potential legal challenges.

Selling an LLC

Your LLC's buy-sell agreement will not offer specific guidance on how to sell your company. Instead, it will list the way in which members can complete transfers among themselves and new members. When selling your LLC, you must first finder a buyer and agree on a certain price. After examining your records and books, the buyer may wish to buy all of your company or part of your company. 

Although this may seem like a straightforward process selling your LLC can lead to various legal, financial, and tax-related implications. This is why it is best to consult a lawyer who has experience in this area. At first, a term sheet may be created followed by a more formal contract. This is also why operating agreements are recommended when you first form, including all buy-sell provisions. This can help the process run more smoothly when the time comes. 

Changing the ownership of your LLC is a large decision, one that could significantly influence the company's long-term success. This is why you must understand the weight of each decision — as well as the requirements involved. Whether you have considered transferring a partial interest or you would like to sell 100 percent of your LLC, there is assistance available. 

Steps for a Full LLC Ownership Transfer

A full transfer of LLC ownership requires multiple legal and administrative steps, including:

  1. Review the Operating Agreement – Check for any clauses that dictate transfer procedures.
  2. Obtain Member Approval – If required, secure written approval from all members.
  3. Negotiate the Sale – Determine a fair market price and execute a purchase agreement.
  4. Update State Filings – File an Amended Statement of Information with the Secretary of State.
  5. Notify the IRS – Update the EIN and submit tax forms reflecting ownership changes.
  6. Close Business Accounts – If transferring to new ownership, banking and credit accounts may need updates​.

Legal and financial professionals should be consulted to minimize liabilities and streamline the transition.

Frequently Asked Questions

1. Can an LLC transfer ownership to an outside party? Yes, but it depends on the LLC’s operating agreement and state laws. Some agreements limit transfers to existing members, while others allow third-party sales with approval.

2. Does transferring LLC ownership affect taxes? Yes. Ownership changes may trigger capital gains taxes and require IRS notification, especially if it alters the LLC’s tax classification.

3. What happens if an LLC lacks a buy-sell agreement? Without a buy-sell agreement, state laws dictate the transfer process, which may involve LLC dissolution before ownership can be reassigned.

4. Do I need to file paperwork with the state when transferring LLC ownership? Most states require an Amended Statement of Information or an update to the Articles of Organization to reflect the new ownership.

5. How long does it take to transfer LLC ownership? The process can take a few weeks to several months, depending on state requirements, legal complexities, and tax implications.

If you need help with an LLC transfer of ownership, 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.