Selling Shares in an LLC

Selling shares in an LLC can seem like a rather daunting task, full of questions. Perhaps a friend is a partner in an LLC that is doing well and you’re curious as to whether or not you can get in on the action by buying some shares. Maybe you have been a partner in an LLC and you want to have a decreased investment in the company.

What Is an LLC?

An LLC, or Limited Liability Corporation, is privately held, not publically held. As such, they do not trade shares (also known as stocks) on the Stock Exchange.

There is an exception to this, and that is an LLC that is structured as a Publically Traded Partnership or PTP. Due to the restrictions that the Internal Revenue Service places on PTPs regarding qualifying income, many PTPs are found largely in the energy and natural resource industries. Once a company, even an LLC, begins trading on a stock exchange, they are held to the same standards of public reporting as a publically held corporation, whereas an LLC that is not a PTP has no public reporting obligation. Additionally, a PTP can only trade up to two percent of their partnership each year.

How Does an LLC Differ From a Corporation?

Here are some of the key differences between an LLC and corporation:

  • A corporation maintains a board of directors, which serves as the governing body to whom the C-Level staff (Chief Executive Officer, Chief Operating Officer, et al) report.
  • The people who “own” a corporation are often called shareholders, wheres with an LLC, they are partners or members. The members of an LLC are the decision-makers; the decision-making of a corporation, (also known as a C Corporation) is handled by those who own majority shares. This is typically limited to the Board of Directors and the executive staff.
  • Corporations are required to conduct regular meetings of the Board of Directors and keep minutes of such meetings; an LLC has no such requirement (remember: an LLC is not required to even maintain a Board of Directors).
  • Shareholders of a corporation are not held liable for fiscal responsibilities, however, the members of an LLC can be held liable.
  • In an LLC, the members pay taxes on the profits, whereas with a corporation, the company itself pays the taxes, not the shareholders.

How Does an LLC That is Not a PTP Sell Shares?

Essentially, an LLC operates much like that of a partnership. This means that the members of the LLC decide among themselves how they go about buying or selling percentages of business.

If you are a member of an LLC, hopefully the company had the foresight to establish upfront the parameters of doing this, or an operating agreement. Without an operating agreement, the withdrawal of a member can create a lot more than simply hurt feelings; it can create a heap of legal and financial problems as all parties attempt to determine how to best liquidate the exiting member’s percentage in the company without perhaps bankrupting the LLC.

If the company does not have the liquid assets to simply cut a check to the selling member (depending upon the construct of the operating agreement), the remaining members may be required to contribute capital to the company. The easiest way, as an exiting member of an LLC, to sell your shares is to simply sell them to a new member who is willing to buy your shares, as 100 percent of the shares of an LLC are required to be split among all of the members.

The Only Certainties in Life Are Death and Taxes

Unless you happen to be a tax attorney with a membership in an LLC, you will want to be sure you consult professionals if you are selling your shares to ensure that you are paying the appropriate amount of taxes on the money you receive versus your original investment. This is particularly important when considering you were already paying taxes on the income being generated by the LLC. Hopefully, the LLC from which you are looking to exit does not possess any outstanding debt; otherwise, you will be on the hook for contributing some of your profits from the sale to paying down that debt.

If you need help with selling LLC shares, 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.