Key Takeaways

  • Selling an LLC can involve transferring partial ownership or the entire business, each with unique legal and tax implications.
  • Your operating agreement is crucial in guiding ownership transfers, setting valuation terms, and determining member rights.
  • A buy-sell agreement provides key procedures for member exits and interest transfers—if missing, state laws may require dissolution.
  • Selling an entire LLC usually involves either a membership interest sale or an asset sale; both require legal due diligence and tax planning.
  • The buyer will typically conduct due diligence and negotiate a purchase agreement with defined terms.
  • Post-sale, you must update legal registrations, notify tax agencies, and file any necessary dissolution paperwork if the entity is closed.

Selling a LLC

When selling a LLC, there are certain procedures to follow, especially when it comes to ownership transfers. Many LLCs change ownership during the lifetime of the business. Such reasons could include:

  • A member deciding to exit the business
  • Existing members wishing to add new members
  • A member dying, or becoming unable to participate in the business due to divorce or disability
  • Deciding to sell all of the business

The transfer process depends on if you’re transferring all or a portion of the business, and how many members are involved. LLC owners are also called members, and each member owns a certain stake in the LLC, also called a membership interest. If you need to change an ownership percentage, for instance, you would have to transfer a portion of the membership interest to another party.

Selling a Partial vs. Entire LLC Interest

When selling your LLC, it's important to distinguish between two main approaches:

  1. Selling Membership Interest: This means transferring ownership rights from one or more existing members to another party. This does not typically change the LLC’s operating structure or tax status.
  2. Selling Business Assets: Instead of selling the ownership itself, you may choose to sell the company’s assets—such as property, inventory, and intellectual property—leaving the legal entity intact but effectively transferring control.

Each route has different tax consequences. Selling membership interests is often simpler administratively, but asset sales might offer buyers more control over liabilities.

Operating Agreement

A key document to guide you through the process is your operating agreement. An operating agreement establishes certain operating procedures and the general management structure of your business.

Further, you should include provisions in the event of the selling the company, and you may tailor such sections to your liking. You should also include sections regarding ownership transfers, or your business could have a separate buyer-seller agreement.

Such provisions usually detail methods on the value of the business and the membership interests. The provision may also outline the following:

  • Certain restrictions on who qualifies for members
  • Rules mandating the buy-back of shares from departing members
  • Parameters on approving new transfers

Valuation and Pricing the LLC

Before selling, determine a fair market value for your LLC. You can do this by:

  • Hiring a professional business appraiser.
  • Using valuation formulas such as EBITDA multiples or discounted cash flow analysis.
  • Reviewing recent sales of comparable businesses.

Accurate valuation not only helps set a realistic asking price but also reassures potential buyers that your LLC is a worthwhile investment.

Buy-Sell Provisions

If the agreements does not have a buy-sell provision, you should check with the guidelines of your state on how to proceed with a membership transfer. You could negotiate a better agreement in order to obtain the right transfer that suits your needs. In certain states, you may need to dissolve the business if the agreement does not allow for ownership transfers. Because such actions have long-term ramifications on your business, you should always talk to a lawyer.

Moreover, you should also review the operating agreement to ensure that the document is current and meets all of your core standards as you go through membership changes. For instance, operating agreements for sole-members LLCs may not have certain provisions needed for multi-member LLCs. If you have an old operating agreement that’s out of date, you should draft a new one that shows the new ownership system, and you should sign it accordingly, along with other members.

If a new agreement needs to be changed, you can amend it to include newer members. You usually do not have to file any paperwork with state officials to finalize a member transfer process, but you need to include a list of new members on future annual reports.

Due Diligence and Purchase Agreement

Buyers typically conduct due diligence to assess your business’s legal standing, financial health, and operational risks. This includes reviewing:

  • Financial statements and tax filings
  • Contracts and leases
  • Licenses and permits
  • Outstanding debts or litigation

Following due diligence, the buyer and seller sign a purchase agreement that outlines the sales price, transition terms, and contingencies. Legal counsel is highly recommended to negotiate and draft this document properly.

LLC Governance

Despite the name, a buyer-seller agreement does not provide guidance in selling all of the business to third parties. Rather, it governs the manner in which members transfer interests within the business and to new members.

To successfully sell your LLC, you need to get a buyer and settle on a price. Such a move may involve the following:

  • Invoking the services of a business value expert
  • Getting the buyer to look at your records and business books

You may also use a combination of the two aforementioned ideas. Also, the buyer may wish to buy the entire business or may only wish to buy the assets. Selling the LLC may come with tax and legal implications, which is why should you turn to a lawyer before selling the business. The sales terms may be noted in a memorandum of understanding or term sheet and a formal agreement.

You should always plan for the future by including buyer-seller provisions in the operating agreement. Buyer-seller terms can aid in the transfer process and avoid complications. If you do not have a buyer-seller agreement, or if you want to sell all of the LLC, getting legal counsel would be the best option.

Legal and Tax Steps After Selling

Once the LLC is sold, several administrative tasks remain:

  • Notify your state agency: Update ownership records with the Secretary of State, if required.
  • Update EIN information: If the buyer is continuing the entity, notify the IRS of any responsible party change.
  • Close tax accounts: File final state and federal tax returns if the LLC is dissolved.
  • Cancel business licenses: Inform local and state agencies to avoid future tax liability.
  • File Articles of Dissolution: If the LLC is ending entirely, this document formally closes the business with the state.

These steps help finalize the transition and prevent future legal or tax issues.

Legal Assistance

You should get a lawyer to avoid messy legal and tax ramifications, and many lawyers specialize in such business deals. Moreover, attorneys can guide you in obtaining the right tax qualifications from the sale of an LLC, and they will help you avoid legal entanglements throughout the transaction.

Frequently Asked Questions

1. Do I need member approval to sell my LLC interest?

Yes, most LLC operating agreements require majority or unanimous consent from existing members for ownership transfers.

2. What is the difference between selling LLC membership interest and selling assets?

Selling membership interest transfers ownership of the LLC entity itself, while selling assets transfers the business’s operational elements but not the entity.

3. Is a business valuation necessary when selling an LLC?

It’s highly recommended. A proper valuation supports your asking price and builds buyer confidence.

4. What taxes apply when selling an LLC?

Capital gains taxes typically apply. The exact tax treatment depends on the sale structure and whether it's a pass-through entity or taxed as a corporation.

5. Do I need to file any paperwork with the state after selling?

Yes, depending on the state and the sale type, you may need to update member information, file final reports, or submit dissolution documents if the LLC is closing.

If you have more questions on selling a LLC, submit your legal inquiryto our UpCounsel marketplace. UpCounsel’s lawyers have graduated from some of the best law schools in the county and will give you the best advice on selling an LLC, or any business entity. In addition, they will guide you in drafting an operating agreement that you and all members of an LLC can agree to.