Updated June 30, 2020:

As an LLC transfer of ownership form must be planned in advance; it's important to create provisions for these situations in the Operating Agreements regarding changes in ownership. The Operating Agreement will also contain provisions for other events such as the passing of a member, introduction of a new member, divorce, retirement, and buy-sell provisions. Owners pay for their ownership percentage after agreeing on an initial price.

LLC Transfer of Ownership: Overview

An LLC is an entity with a business structure that has been registered with the Secretary of State in the state the business operates in. This type of business structure reduces the financial liabilities of the owners in the event of insolvency or legal ruling. The owners of an LLC are called members and pay the originally agreed upon amount for their percentage of ownership.

All liabilities incurred by the corporation are paid by the corporation. Many Limited Liability Corporations make plans in the event of a future change of ownership; provisions are written in the Operating Agreements and Articles of Organization. A buy-sell agreement is required for a change of ownership to occur-this is outlined in the Operating Agreement and created when the LLC is registered.

Ownership can change hands for a multitude of reasons included but not limited to:

  • The exit of a member from the company
  • A member passes away, divorces, or becomes disabled
  • The business is sold by the owners
  • A current member decides to bring a new member into ownership

Regardless of what the reason may be for the change of ownership, it's crucial to modify the certificates of the organization and make the changes official; otherwise, the departing member's liabilities may cause issues for the corporation.

How to Sell an LLC?

In a corporation, shares of stock are issued and may be transferred freely or even gifted to other owners. In LLCs, however, this does not apply. Since LLCs are more like partnerships, you cannot force partnerships between people without their agreement. You can only transfer an LLC's ownership interests if all the other LLC owners agree, and even then, only if the state law allows for it. The first step in selling an LLC is finding the right buyer, someone who will purchase the business at the best price.

Getting the ideal price may involve:

  • Using a business valuation expert
  • Allowing the potential buyer to analyze the LLC's accounting records
  • Forecasting potential sales

The buyer of an LLC may want to purchase the LLC as a whole business or only the assets. Selling an LLC will most likely bring with it a plethora of legal, financial, and tax implications. With that in mind, it's a good idea to contact an experienced attorney who has plenty of experience in selling and buying LLCs.

The terms of the sale of the LLC may be initially confirmed through a memorandum of understanding or a term sheet, followed by a supplementary formal contract. LLC members can help plan for ownership transfers by making sure to include buy-sell provisions in the LLC's Operating Agreement. Adding a few buy-sell provisions to an Operating Agreement will help to keep the transition moving forward, helping to avoid disruptions. LLCs currently operating without a buy-sell agreement should seek the advice of an experienced attorney to assist in the creation of buy-sell provisions.

Steps to LLC Ownership Changes

Members of an LLC will usually find the necessary steps to address ownership changes in the Operating Agreement. An LLC Operating Agreement is considered to be the most significant document of the LLC because it draws out the framework and roles of the business. More specifically, this agreement outlines the working and financial relationships between the managers and members of the company.

The fifth article in an Operating Agreement addresses the protocol for removing or adding members and the process for transferring ownership. More specifically, the procedures to transfer the ownership of an LLC will depend on whether the entire business is being transferred or simply the names and percentages in ownership. For example, bringing in an additional member or buying out a current one is a much simpler change than transferring the entire LLC.

Transferring a Partial Interest in the LLC

The owners of an LLC are referred to as members with each individual owning a membership interest or percentage of the business. It's necessary to transfer a portion of your LLC's membership interests in order to modify ownership percentages or allow new members to join. The Operating Agreement is the central document that will provide guidance on how to transfer some of the ownership in an LLC.

It's highly likely that you signed the Operating Agreement when you formed your LLC. The Operating Agreement document details exactly how the LLC operates and is agreed upon by all members of the LLC. When the LLC is registered, the Operating Agreement is established and usually includes language referring to provisions of buying and selling; this portion of the document details the scenarios in which ownership may change and how to perform this properly.

Some of the main reasons why an LLC changes hands are:

  • A member passes away unexpectedly
  • The LLC is sold outright to a new owner
  • The retirement of one or more current members

If the Operating Agreement includes provisions for a buyout or buy-sell provisions, this will determine how ownership is transferred. An LLC can also have an entirely separate buy-sell agreement. There may be additional legal subjects addressed in a buy-sell agreement such as divorce settlements or judgments among other legal reasons. The specific methods for valuing a business and membership interests of the business are in the buy-sell provisions.

This might also specify how ownership transfer is approved, who may become a member, or the buy-back of shares from departing members. It's crucial to create a buy-sell provision or buyout agreement if one does not currently exist. For guidance, look to your state statutes for information on how to transfer interest among members. You should be able to negotiate a written agreement in order to transfer ownership or buy-sell agreement.

Failing to negotiate the buy-sell agreement could make the dissolution of the LLC have an unfavorable outcome. Depending on your state, it's necessary for the company to dissolve if there are no provisions for ownership transfers in the Operating Agreement. If one member desires to leave the LLC, this does not mean that all members of the LLC want to do the same.

Transferring a partial interest in an LLC may have extremely consequential long-term effects on your business. It's important to contact an experienced lawyer before beginning the complicated process of transferring a partial interest in an LLC. It's often well worth the additional cost to have a lawyer create a provisional agreement to clearly identify the terms regarding the buyout. This should help prevent any problems or disputes from occurring in the future.

When a transfer of partial interest is done incorrectly the departed member or members, liability may still exist for the LLC. For example, in cases where a member is no longer participating in daily operations or has stopped receiving their share of the profits, the LLC may still be liable for these expenses and liabilities. The inactivity of a member doesn't automatically cancel out their membership. If the member later files for bankruptcy and the court finds out that the member has a percentage of ownership in the LLC, the LLC may be held liable for paying the personal expenditures of the inactive member.

Operating Agreements should be analyzed to ensure that they're up to date, relevant, and meet the needs of the business. A good time to review the Operating Agreement is when a partial interest in the LLC is being transferred. As a business grows the requirements of the LLC will also most likely change simultaneously. For example, the Operating Agreement of a single-member LLC will most likely not be as complex as a multi-member one.

An Operating Agreement for an LLC may also be known as an:

  • Operating Agreement LLC
  • LLC Agreement
  • LLC Partnership Agreement
  • Operating Agreement for LLC

When an Operating Agreement becomes outdated or irrelevant, it should be replaced by a more modern version. All members in the LLC should be involved in preparing and signing a new agreement, one that acknowledges the updated ownership structure. If a totally new agreement seems out of the question, then an amended version may be prepared that identifies the new members.

An Operating Agreement controls your LLC, rather than a governmental agency. If an agreement does not exist, state law will end up governing the countless aspects of the business. The bottom line is that if your LLC doesn't create an Operating Agreement, the state will create one on your behalf. For example, many states will force members to share profits equally among members, regardless of the capital contributed.

In most states, a record of the ownership transfer doesn't need to be filed. However, the list of the current members should be recorded when submitting annual reports to the state.

Completing the Buyout Agreement

A buy-sell agreement determines the way that members transfer membership interest among themselves, including new members. It does not provide instruction on how to sell your business to an entirely new third party. A buyout agreement consists of several components that are common; a number of templates can be accessed online. All parties involved in the buyout agreement should be named and include contact information as well as the member's ownership value.

The document should clearly specify the situation, addressing whether the member is being bought out or renouncing their membership. For example, regarding a divorce, a wife may relinquish herself for no financial consideration as part of the act of divorce. In other scenarios, a member's shares may be bought be an outside party or another member(s) of the LLC itself.

This commonly occurs with "key man" insurance policies, which are insurance policies that an LLC purchases to cover the loss of revenue or expenses that may result when a key member of the business becomes disabled or dies. These "key man" insurance policies help an LLC to carry-on doing business while it works its way through the loss of a member.

Steps to Take After Completing a Buyout Agreement

Once a buyout agreement has been completed, an updated Certificate of Organization should be created to acknowledge the updated ownership changes. Before finalization, make sure that the departing member turns in their member certificate(s). Also, if applicable, make sure to issue a new member certificate(s) to identify the valuation interest in the LLC. In cases where there is no new owner and the LLC retains the remaining interest, then have the remaining LLC members absorb the units or reallocate the interest among the remaining members.

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