Sale of LLC Membership Interest: Everything You Need to Know
The sale of LLC membership interest sometimes comes about due to a change in ownership at some point during the lifespan of the business.3 min read
Updated July 13, 2020:
The sale of LLC membership interest sometimes comes about due to a change in ownership at some point during the lifespan of the business. Ownership changes happen for many reasons, but the need to sell is the same regardless.
Selling an Interest in an LLC
When you decide to sell a percentage ownership in your LLC, it has consequences for the management of the business. As you know, the LLC is formed through state law and managed as a partnership. All owners, also known as members, are afforded an equal right to participate in the company management. When you sell your percentage to an outsider, you are bringing in a partner who has the same authority as you do even if you retain a majority ownership in the LLC.
When you decide to sell your LLC, you need to sell your membership interest through a bill of sale. If you are a single member LLC, you have the right to sell your interest(s) for any amount you name. But if you're an LLC with multiple members, there may be rules in the Operating Agreement that set the value of the LLC. And there may also be rights of refusal to give the other members in the LLC the opportunity to buy or pass on your shares.
Once you decide to sell your shares of the LLC, you need to file Articles of Amendment with the state agency that governs your LLC. The procedure used to transfer ownership of the LLC depends on whether you're transferring the entirety of the business or changing the percentage ownerships and names of the ownerships.
Transferring a Partial Interest
The parties involved in an LLC are known as members. Each member has ownership of a percentage of the business. This is known as a membership interest. Changing the percentage of ownership or adding new members means that there's a need to transfer some of the membership interests of the LLC. Most states allow the addition of new members only with unanimous consent from the existing members.
The ownership structure of an LLC requires 100 percent of ownership to be allocated to existing members. If a new member is to buy into the company, their ownership percentage comes out of the percentages held by the existing members. The Operating Agreement specifies how the sale and transfer of ownership is handled. In the event the Operating Agreement does not have a buy-sell agreement, you should check with your state statutes to learn how to handle the transfer of membership interests. Some states may require the dissolution of the company if there is no buy-sell agreement laid out in the Operating Agreement.
Selling an LLC
Selling your LLC may be a complex affair due to the legal, financial, and tax implications involved. It's best to consult with a lawyer before engaging in a sale of the LLC for the best possible outcome. And if you plan to sell your LLC or your share at some point in the future, it's a good idea to have a buy-sell agreement included into the Operating Agreement.
The transaction is more likely to proceed smoothly if your Operating Agreement has a buy-sell agreement. In the event you don't have a buy-sell agreement, again, you may want to consult with a lawyer for the best possible way in which to proceed.
Once you have the buy-sell agreement situation settled, you need to determine the value of the ownership percentage. It can be difficult to determine a value, especially if the company has been closely-held. Current members may base the buy-in price on their contributions made to the company over the period of its existence.
After the terms of sale are negotiated, a written membership interest sales agreement can be created to record the transaction. This agreement should detail the new member's ownership percentage, the amount of the buy-in, and require that the new member agree to be bound by the existing Operating Agreement of the LLC. Once everything has been settled and signed off by the remaining members, the new member can take your place while you make your exit.
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