Transfer Ownership of LLC: Everything You Need to Know
To transfer ownership of LLC-structured entities, you need to go through a simple process, but there may be a few challenges along the way.4 min read
To transfer ownership of LLC-structured entities, you need to go through a simple process, but there may be a few challenges along the way. Sometimes ownership changes cannot be helped as there are situations that are out of everyone's control, like a member passing away. Other reasons to transfer ownership could include:
- Someone wanting to leave the LLC
- Someone wants to bring in a new member
- A member divorces or becomes disabled
- Decision to sell the entire business
Because LLCs are regulated by state law, individual states have rules on how they operate.
How to Transfer Ownership in an LLC
If you need to transfer ownership within an LLC, start by researching your respective state's LLC regulations. Some states dictate ownership interests can only be transferred with the unanimous consent of all owners. You can draft your Operating Agreement to address ownership transfer conditions, which then modify the standard state rules. Ensure your Operating Agreement includes “buy and sell” language, which is the outline of how the process should be handled.
You must provide a valuation method that all members can agree on. Without an agreed valuation, members may run into serious difficulty transferring ownership. Neither party will know what their ownership share is worth. What if the seller feels the ownership interest is worth $15,000 while the buyer feels it is more like $5,000?
Your operating agreement should either make it simple or difficult for potential buyers to make offers, and sellers to accept, negotiate, or reject said offers. It's important to understand that some of these transactions can be emotionally driven and the original LLC members need to decide up front how easy of a process this should be. Do you want the ability to add new members without much work, or do you want to keep the LLC very small?
When you're including the “buy and sell” language in your Operating Agreement, decide whether there are any restrictions on transferring ownership. In other words, do you only want members to sell to other existing members?
Selling an LLC
If you plan to sell the entire business, the buy-sell agreement won't offer any assistance here. It only handles the way members transfer interests, not how to sell the business to a third party. To sell your business, start by finding the right buyer and agree on the price. You may need the services of a business valuation expert and/or have the buyer examine your books and records. You may find that a buyer only wants to purchase the LLC's assets rather than the entire business. It's important to understand that selling the business can have financial and legal consequences. It's best to consult with a lawyer who specializes in buying and selling LLCs.
Transferring Single Member LLC to Someone Else
If your LLC is a single-member LLC, you can transfer the entire LLC to someone else. There are a few steps to complete this process:
- Assign your interest to the other party. You can draft a resolution of the members of the LLC showing approval of the transfer.
- Amend your Operating Agreement (if you have one) to remove the seller as a member and add the new buyer. You may not have an Operating Agreement since most states don't require single-member LLCs to have one.
- Check with your respective state on how to update your members on record.
- Complete a buy-sell agreement, which includes information like asset prices, sales price of the business, and any other pertinent information the IRS would be interested in.
- The new owner will need a different EIN.
Complete the Buyout Agreement
You can find buyout agreement templates, or you can make your own provided it contains the necessary information:
- Name all parties
- Membership unit value
- Contact information
- State whether the member is being bought out or relinquishing him or herself
If there is no buyout agreement, you must create one. If you don't, there is a chance the LLC could be dissolved. You must remember that while one member wants out, not everyone else may. No matter who drafts the buyout agreement, ensure it clearly states buyout terms to prevent any problems in the future.
Please complete this task correctly as there is a chance for personal liability if it's done incorrectly. An example is when a member no longer helps with operations or doesn't receive profit sharing. Although inactive, it doesn't mean he or she is removed from ownership. If this particular member files bankruptcy later on and the courts realize this person still has ownership interest, the LLC might be responsible for the inactive member's personal debt.
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